SBI Research urges the government to abolish long-term capital gains tax on equities and extend holding periods to 2-3 years. The move is aimed at attracting foreign portfolio investor (FPI) inflows and countering sustained market outflows.
The State Bank of India (SBI) Research has called for the abolition of long-term capital gains (LTCG) tax on equities and an extended holding period of two to three years to attract capital inflows and improve investor sentiment amid sustained foreign portfolio investor (FPI) outflows from Indian equity markets. In its latest Ecowrap report, SBI Research highlighted the need for structural measures by the government to strengthen capital inflows, stating that monetary and foreign exchange interventions by the Reserve Bank of India (RBI) alone may not be sufficient to address the challenges facing the rupee.
Call for Structural Reforms to Attract 'Hot Money'
"The Government must seriously look into anchoring hot money flows into the equity segment by extending the holding period to say 2-3 years and abolishing the long-term capital gains tax for equity," the report stated.
The report underscored the scale of foreign investor withdrawals from Indian equities, noting that outflows by FPIs in the equity segment amounted to Rs 3.51 lakh crore between 2021 and September 2026. It further highlighted that 2026 alone witnessed outflows exceeding Rs 2.61 lakh crore, over and above Rs 1.66 lakh crore recorded in 2025.
According to SBI Research, the persistent outflows point to weakening investor participation and the need for policy interventions that can make Indian equities more attractive to global capital. "The alarming situation definitely calls for suitable measures to anchor flows of Hot Money in the equity segment ($13 bn outflows in FY27) through both alignment with themes driving allocation as also sweeteners on taxation / cap gains front," the report said.
Tax Incentives to Boost Competitiveness
SBI Research observed that India continues to offer structural investment opportunities, with domestic blue-chip companies and prominent listed firms holding the potential to generate attractive returns. However, it stressed that taxation-related incentives could help improve the competitiveness of Indian equities and encourage incremental foreign investment.
The report also recommended creating a more favourable taxation framework for investors willing to commit capital for a longer period, suggesting that a holding period of around three years could help attract more stable investment flows. "Building substantially low taxation moats for such allocators, post a reasonable period say 3 years holding, can accentuate incremental flows as India Play remains structurally attractive and marquee/blue chip names locally promise lucrative returns in a competitive market," it stated.
Broader Economic Context and Other Recommendations
The report's recommendations come amid broader concerns over the rupee's depreciation and pressure on India's balance of payments. While RBI has announced several measures to support the domestic currency and manage foreign exchange market pressures, SBI Research report emphasised that sustained improvement in capital inflows would require longer-term structural reforms by the government.
The report also called for greater clarity on withholding tax applicable to external commercial borrowings, currently indicated at 5-20 per cent, to strengthen investor confidence. SBI Research noted that India's foreign exchange reserves remain adequate even under stressed scenarios, but the balance of payments surplus is expected to narrow to around USD 55-60 billion in FY27, reinforcing the importance of measures to attract foreign capital.
The report's proposals seek to improve the attractiveness of Indian equities, encourage longer investment horizons and address persistent foreign portfolio outflows through changes in the taxation framework. (ANI)
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