Amid sustained foreign portfolio investor (FPI) outflows from Indian equity markets, the State Bank of India (SBI) Research in its Ecowrap report has called for abolishing the long-term capital gains (LTCG) tax on equities which can help ensure such investors to remain invested in the market for a longer duration. It said the government must seriously look into anchoring hot money flows into equity segment by extending the holding period to 2-3 years and eliminating the long-term capital gains tax on equities.
According to the report, the proposal aims to anchor volatile foreign capital flows in the equity segment and reduce the risk of sudden outflows that can put pressure on the rupee. Presently, FPIs pay a 12.5% LTCG tax on the investment in equities. The Union Budget 2026 has kept the LTCG tax on listed equities and equity mutual funds at 12.5%, extending a framework established during a major fiscal overhaul in 2024. So far in October 2026, foreign investors have withdrawn Rs 44,166 crore from Indian equities, and in the year, the outflow has been over Rs 3 lakh crore, as elevated crude oil prices, a firmer US dollar and higher US bond yields weigh on investor sentiment. Also, the artificial intelligence-led rally in North Asian markets is attracting more foreign capital.
SBI Research has also suggested streamlining the repatriation of export proceeds within a reasonable period of around six months, noting that exporters typically extend credit periods of a similar duration to overseas buyers. Any extension beyond this period should be granted on a case-by-case basis. The measures aim to strengthen foreign currency inflows and improve the stability of India's external accountsIt said the government should consider policy changes to encourage long-term foreign investment and ensure timely repatriation of export earnings. Apart from this, the report also called for greater clarity on withholding tax applicable to external commercial borrowings (ECBs), currently indicated at 5-20 per cent. This is necessary to ensure benefits under DTAAs (Double Taxation Avoidance Agreements) and for consistent application of general and specific clauses by authorities.
