The research arm of the State Bank of India (SBI) has urged the government to abolish the long-term capital gains (LTCG) tax on equities and extend the investment holding period to two to three years to attract foreign capital and strengthen investor confidence. The proposal comes as foreign portfolio investors (FPIs) continue to withdraw substantial funds from Indian stock markets, putting pressure on equities and the rupee.
In its latest Ecowrap report, SBI Research argued that India needs structural policy changes to encourage foreign investors to maintain their investments for longer periods. It said steps taken by the Reserve Bank of India (RBI) to manage currency volatility and external financial pressures may not be sufficient without broader reforms to improve the investment climate.
The report recommended removing LTCG tax on equity investments held for the proposed extended period, describing the measure as a way to encourage more stable capital flows. It also called for policies that could make Indian markets more attractive to international investors at a time when global investment preferences are shifting.
The proposal comes against the backdrop of significant foreign investor withdrawals. According to SBI Research, FPIs have withdrawn around ₹3.51 lakh crore from Indian equities between 2021 and September 2026. Foreign investors have also pulled out more than ₹3 lakh crore from equities in 2026 so far, following substantial outflows in 2025.
The persistent selling has raised concerns about foreign investor confidence in Indian markets. Large-scale withdrawals can weigh on share prices, increase market volatility and put pressure on the rupee as overseas investors convert their proceeds into foreign currencies.
SBI Research believes changes to the capital gains tax regime could help address some of these concerns. Under the current rules, gains from listed equity shares and equity-oriented mutual funds held for more than 12 months are generally classified as long-term capital gains. Such gains exceeding ₹1.25 lakh in a financial year are taxed at 12.5%, excluding applicable surcharge and cess.
The research unit has proposed extending the holding period to two or three years alongside abolishing the tax on qualifying equity investments. The intention is to encourage investors to commit funds for longer periods rather than move capital in and out of Indian markets in response to short-term changes in global conditions.
However, the proposal remains a recommendation and does not represent a change in government policy. Investors continue to be subject to the existing tax rules unless the government announces a formal amendment.
The debate has gained fresh attention as the government begins preparations for the next Union Budget. Finance Minister Nirmala Sitharaman said on October 13 that it was too early to make commitments on possible changes to LTCG tax or securities transaction tax (STT). She indicated that investor concerns would be heard during the Budget consultation process, without promising any tax relief.
The discussion also comes amid broader concerns about India’s ability to attract and retain foreign investment. Global investors consider several factors when allocating funds, including corporate earnings, market valuations, economic growth, currency movements and taxation. A change in capital gains tax could improve the relative attractiveness of Indian equities, but it may not be sufficient on its own to reverse the trend in foreign portfolio investment.
Higher US bond yields and a stronger dollar have made investments in developed markets more attractive to global funds. Rising crude oil prices and geopolitical uncertainty have added to concerns about India’s import bill, inflation and currency stability. These factors have contributed to pressure on Indian financial markets and influenced foreign investors’ decisions.
Domestic institutional investors have helped cushion the impact of foreign selling by continuing to invest in Indian equities. Mutual funds, insurance companies and other domestic institutions have provided support during periods of heavy FPI withdrawals, although sustained foreign selling can still affect market sentiment and valuations.
SBI Research has also called for measures to improve foreign exchange inflows, including faster repatriation of export proceeds and greater clarity on the taxation of external commercial borrowings. These recommendations form part of a broader effort to strengthen India’s capital flows and reduce pressure on the rupee.
The proposal to scrap equity LTCG tax is likely to prompt debate over the balance between attracting investment and protecting government revenue. Removing the tax could benefit eligible investors and improve after-tax returns, but the fiscal impact would depend on investment behaviour and the volume of gains that would otherwise have been taxed.
SBI Research’s recommendation places equity taxation back in focus as India seeks to strengthen its position among emerging markets. Whether the government adopts the proposal will depend on its assessment of capital flows, revenue implications and the wider economic outlook.