SBI Research Advocates Elimination of Long-Term Capital Gains Tax
State Bank of India economists urge the government to abolish LTCG tax on equities to stabilize foreign investments.
SBI Research recommends scrapping the 12.5% LTCG tax to encourage long-term equity investments.
Foreign investors have withdrawn over Rs 3 lakh crore from Indian equities in 2026, impacting market stability.
The report calls for policy changes to enhance foreign capital inflows and simplify export earnings repatriation.
Economists at the State Bank of India (SBI) have proposed the removal of the long-term capital gains (LTCG) tax on equity investments, citing a need to stabilize foreign investment in Indian markets. This recommendation comes amid significant withdrawals by foreign investors, who have pulled out over Rs 3 lakh crore from Indian equities in 2026 alone. The SBI's Ecowrap report suggests that abolishing the 12.5% LTCG tax could encourage investors to maintain their positions for longer durations, thereby enhancing market stability.
The backdrop to this recommendation includes a series of economic pressures affecting investor sentiment, such as rising crude oil prices, a stronger US dollar, and increasing US bond yields. These factors have contributed to a decline in foreign portfolio investments (FPIs) in India, with October alone witnessing sales worth Rs 44,166 crore. The report emphasizes that the government should consider extending the holding period for equity investments to 2-3 years to mitigate the volatility associated with 'hot money' flows.
SBI Research also highlighted the recent measures taken by the Reserve Bank of India (RBI) to address the depreciation of the rupee, stating that while these efforts are commendable, the government must also tackle long-standing structural issues regarding capital inflows. The report pointed out that the current LTCG tax framework was retained in the Union Budget 2026, which continues the fiscal policies established in 2024.
In addition to tax reforms, the report advocates for simplifying the repatriation process for export earnings, suggesting a reasonable timeframe of six months. This change aims to align with the credit periods typically offered by exporters to overseas buyers. Furthermore, SBI Research called for greater clarity regarding withholding taxes on external commercial borrowings (ECBs), which currently vary between 5% and 20%. Clearer regulations would help ensure that investors benefit from Double Taxation Avoidance Agreements (DTAAs), thereby boosting investor confidence.
Looking ahead, the recommendations from SBI Research could lead to significant policy shifts aimed at attracting and retaining foreign investment in India. The government’s response to these proposals will be crucial in determining the future landscape of equity investments and the overall health of the Indian economy. Stakeholders are keenly awaiting any announcements that may arise from these discussions, particularly in light of the ongoing challenges in the global economic environment.
