SBI Research has proposed abolishing long-term capital gains tax on equities and extending investment holding periods to encourage foreign investors to stay invested longer amid heavy outflows.
Economists at the State Bank of India (SBI) have called for abolishing the long-term capital gains (LTCG) tax on equities to encourage longer-term investment and help stabilise foreign capital flows. The recommendation comes as foreign portfolio investors (FPIs) continue to withdraw substantial funds from Indian stock markets.
In its Ecowrap report released on October 12, SBI Research suggested extending the holding period for equity investments to two or three years while removing the LTCG tax on equities. The report said the measures could help anchor volatile foreign investment flows and reduce the risk of sudden withdrawals that put pressure on the Indian rupee.
Foreign portfolio investors currently pay a 12.5% LTCG tax on equity investments. The Union Budget 2026 retained the existing rate for listed equities and equity mutual funds.
According to the report, foreign investors withdrew ₹44,166 crore from Indian equities during the first part of October. Total FPI withdrawals from Indian equities in 2026 reached ₹3.04 lakh crore, exceeding the ₹1.66 lakh crore recorded during the whole of 2025.
SBI Research attributed the selling pressure to elevated crude oil prices, a stronger US dollar and higher US bond yields. The report also pointed to the artificial intelligence-driven rally in North Asian markets, which has attracted foreign capital away from Indian equities.
Experts cited in the report said the absence of major AI-themed investment opportunities in India and the availability of relatively attractive risk-free returns in markets such as the United States were also influencing investor decisions.
Beyond equity taxation, SBI Research recommended streamlining the repatriation of export proceeds. It suggested allowing a reasonable period of around six months, consistent with the credit periods exporters often extend to overseas buyers. Any extension beyond that period should be considered on a case-by-case basis.
The report also called for greater clarity on withholding tax applicable to external commercial borrowings (ECBs), which currently ranges from 5% to 20%. It said consistent application of tax treaty benefits under Double Taxation Avoidance Agreements (DTAAs) could improve investor confidence.
The recommendations are proposals by SBI Research and do not represent announced government policy changes.
