With foreign investors pulling money out of Indian equities, economists at the country’s largest lender, State Bank of India (SBI), have proposed scrapping the long-term capital gains (LTCG) tax on equity investments to encourage investors to remain invested for longer periods.“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,” SBI Research said in its Ecowrap report.The proposal is aimed at making foreign capital flows into equities more stable and limiting the chances of abrupt withdrawals that could put pressure on the rupee.The report acknowledged the recent measures taken by RBI to curb pressure on the rupee.“The RBI has taken cudgels, firing a bazooka of measures to arrest the depreciating trends in rupee value,” it said.“While the RBI has been taking all possible steps to thwart a seemingly difficult global playbook, there is an urgent need also by the government to address some of the long pending structural issues regarding capital inflows,” the report said.Foreign portfolio investors (FPIs) currently face a 12.5% LTCG tax on equity investments. The Union Budget 2026 retained this rate for listed shares and equity mutual funds, continuing the tax framework introduced as part of a major fiscal overhaul in 2024.Foreign investors have sold Indian equities worth Rs 44,166 crore so far in October. This has pushed their total withdrawals from the market to more than Rs 3 lakh crore in 2026. Investor sentiment has been affected by elevated crude oil prices, a stronger US dollar and rising US bond yields. At the same time, an artificial intelligence-driven rally in North Asian markets is drawing foreign capital towards the region.The latest selling has taken FPI outflows from Indian equities in 2026 to Rs 3.04 lakh crore, substantially exceeding the Rs 1.66 lakh crore withdrawn during the whole of 2025, according to the data cited in the report.Experts attribute the continued selling to several factors, including India’s lack of stocks linked to the artificial intelligence theme and rising bond yields in other markets, particularly the US. These markets offer investors comparatively higher risk-free returns.
SBI Research suggests changes to export proceeds and tax rules
The report also recommended simplifying the process for repatriating export earnings, with a reasonable timeframe of around six months. SBI Research noted that exporters generally offer overseas buyers credit periods of a similar duration. Any request to extend the repatriation period beyond six months should be considered individually, it said.These proposals are intended to support foreign currency inflows and strengthen the stability of India’s external accounts. SBI Research called for policy changes that encourage foreign investors to take longer-term positions and ensure that export proceeds are brought back within a reasonable period.The report also called for greater clarity on withholding tax applicable to external commercial borrowings (ECBs), which currently ranges from 5% to 20%.It said clearer rules were needed to ensure that borrowers receive the benefits available under Double Taxation Avoidance Agreements (DTAAs) and that tax authorities apply general and specific provisions consistently. Such clarity, it added, would help build investor confidence.
