SBI calls for scrapping LTCG tax on equities to anchor foreign capital

Economists at the State Bank of India have called on the government to abolish the long-term capital gains tax on equities, proposing a strategic policy shift designed to turn transient overseas capital into durable domestic investment.

In its latest Ecowrap report, SBI Research recommended eliminating the levy while extending the qualifying holding period to two or three years. The proposal comes as volatile global headwinds—including elevated US bond yields, a robust dollar, high crude oil prices, and capital rotation towards North Asian tech counters—prompt offshore funds to adjust their portfolios. By removing the tax and extending the required commitment period, the bank argued, India can effectively anchor foreign portfolio flows and insulate the financial system against external market swings.

"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," the report noted.

Why SBI Research wants the LTCG tax abolished

Foreign portfolio investors currently pay a 12.5 per cent long-term capital gains tax on listed equities and equity-oriented mutual funds, a framework maintained in the Union Budget 2026 following broader fiscal restructuring in 2024.

Overseas investors withdrew Rs 44,166 crore from Indian equities in October, bringing net foreign portfolio outflows to Rs 3.04 lakh crore across 2026. That surpasses the Rs 1.66 lakh crore pulled out during the whole of 2025. Market analysts note that these withdrawals reflect international factors rather than domestic fundamentals, as hardening yields in western economies have temporarily increased the appeal of risk-free assets, while artificial intelligence rallies have concentrated liquidity in select East Asian markets.

SBI Research highlighted that decisive interventions by the Reserve Bank of India have acted as a powerful shock absorber for the national currency. The report observed that the central bank "has taken cudgels, firing a bazooka of measures to arrest the depreciating trends in rupee value." However, building lasting stability across external accounts will benefit from complementary fiscal measures that encourage long-term institutional ownership.

Reforms proposed for export proceeds and foreign debt

Beyond equity taxation, the report outlined practical measures to streamline India's external accounts and accelerate inward foreign exchange flows.

The economists suggested tightening the window for repatriating export proceeds to a standard six-month timeframe. Because exporters typically extend six-month credit terms to international clients, SBI Research noted that aligning statutory remittance timelines with commercial practice makes sense. Any extension beyond six months, the report suggested, should be evaluated strictly case by case.

The bank also urged greater administrative clarity on withholding taxes for external commercial borrowings, which currently range between 5 per cent and 20 per cent. Clearer guidance would ensure domestic firms reliably obtain treaty advantages under Double Taxation Avoidance Agreements, eliminating ambiguous interpretations by assessing officers and further reinforcing global investor confidence in India's regulatory stability.