State Bank of India economists have called to scrap the long-term capital gains (LTCG) tax on equities, which can help investors stay invested longer.
"The government must seriously look into anchoring hot money flows into equity segment by extending the holding period to say 2-3 years and abolishing the long-term capital gains tax for equity," SBI Research said in its Ecowrap report.
The measure seeks to stabilise volatile foreign capital flows in the equity segment and reduce the risk of sudden outflows that can put pressure on the rupee.
READ | FM Sitharaman Keeps Door Open To LTCG Tax Rethink As Budget 2027 Prep Begins
Speaking at the Bloomberg New Economy Forum in New Delhi on Tuesday, Finance Minister Nirmala Sitharaman declined to rule out changes to the long-term capital gains tax regime. She said preparations for the next Union Budget have begun, so this was not the right moment for her to say what the government would consider.
At present, foreign portfolio investors pay the 12.5% LTCG tax on equity investments.
The Union Budget 2026 maintained the 12.5% LTCG tax rate for listed equities and equity mutual funds, extending a framework established during a major fiscal overhaul in 2024.
READ | No Proposal To Change Capital Gains Tax Rates At Present, Ministry Of Finance Clarifies
So far in October, foreign investors have pulled out Rs 44,166 crore from Indian equities, bringing the total outflows this year to more than Rs 3 lakh crore as elevated crude oil prices, a firmer US dollar and higher US bond yields weigh on investor sentiment.
Following the recent selling, FPI withdrawals from Indian equities this year have touched Rs 3.04 lakh crore, much higher than the Rs 1.66 lakh crore post during the entire year 2025. Factors driving FPI selling include the absence of artificial intelligence-themed stocks and higher yields in other markets, particularly in the US, PTI reported.
SBI Research has also called for streamlining rules governing the repatriation of export earnings, recommending a deadline of about six months, in line with the credit period exporters generally offer overseas buyers. It said any extension beyond this timeframe should be considered on a case-by-case basis.
It further suggested that the government should consider policy changes to encourage long-term foreign investment and ensure timely repatriation of export earnings. Additionally, the report seeked greater clarity on withholding tax, which is at 5-20% for ECBs is needed, to ensure benefits under DTAA and consistent application of general or specific clauses by authorities.
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