Economists at State Bank of India (SBI), the country’s largest public sector bank, have strongly advocated the complete abolition of Long-Term Capital Gains (LTCG) tax on equity. SBI Research has suggested this in its latest ‘Ecowrap’ report published on Monday. He believes that with this step, foreign and domestic investors will keep their capital invested in the Indian stock market for a long time. This proposal will prove helpful in reducing the risk of sudden outflow of foreign capital from the stock market and providing stability to the exchange rate of the rupee.
Current tax structure and withdrawal of foreign investors
At present, foreign portfolio investors (FPIs) pay LTCG tax at the rate of 12.5 percent on Indian equity investments. This 12.5% tax rate on listed shares and equity mutual funds was retained in the Union Budget 2026. This arrangement was implemented during a major fiscal reform of the year 2024. On the other hand, according to recent data, foreign investors have made a huge withdrawal of Rs 44,166 crore from the Indian stock markets during the month of October, taking the total outflow this year to Rs 3 lakh crore.
Why has it been suggested to remove LTCG tax?
SBI Research has requested the government to seriously consider controlling and stabilizing the volatile capital flows in the equity segment. For this, the option of increasing the holding period from 2 to 3 years and completely eliminating long-term capital gains tax on equity has been suggested. By doing this, the capital of foreign investors will stay in the Indian market for a longer period and the pressure on the Indian currency (rupee) will also be reduced to a great extent.
Why are foreign investors withdrawing their money?
According to financial experts, many global and domestic reasons are responsible for the continuous selling by foreign investors. Among these, rising prices of crude oil in the international market, strengthening US dollar and continuous increase in US bond yields are prominent. Apart from this, the rise of Artificial Intelligence (AI) based stocks in North Asian markets is also attracting foreign investors. This withdrawal of FPI from Indian equities has increased to Rs 3.04 lakh crore in the year 2026, which is much higher than Rs 1.66 lakh crore recorded in the year 2025. Limited availability of AI-themed stocks in India and rising yields in other countries (especially the US) are also the main reasons for this.
Other key suggestions from SBI Research
Withdrawal of export earnings: The report also suggests that export earnings be streamlined within a reasonable time period of about six months. Exporters generally get this time to extend credit period to foreign buyers.
Clarity on withholding tax: More clarity has been sought regarding the withholding tax currently levied on External Commercial Borrowings (ECBs) of 5 to 20 percent, so that the benefits under the Double Taxation Avoidance Agreement (DTAA) can be implemented smoothly.
