SBI Research has proposed removing the long-term capital gains (LTCG) tax on equities and extending the holding period for LTCG benefits from one year to two or three years. This recommendation aims to encourage long-term investment in Indian equities, especially as foreign investors have been withdrawing large sums in 2026.
- SBI Research wants to abolish LTCG tax on equities.
- They propose increasing the holding period to 2-3 years.
- Foreign investors withdrew ₹3.04 lakh crore in 2026 so far.
- Current LTCG tax rate is 12.5% on gains above ₹1.25 lakh.
- Policy changes could improve foreign investment and market stability.
What is the current LTCG tax on equities in India?
The LTCG tax on listed equities and equity mutual funds is 12.5% on gains exceeding the exemption threshold of ₹1.25 lakh. This rate applies to both domestic investors and foreign portfolio investors (FPIs). The tax was retained in the Union Budget 2026.
Why does SBI Research want to abolish the LTCG tax on equities?
SBI Research argues that removing the LTCG tax would encourage investors to hold equities for longer periods, promoting stable and long-term investment rather than short-term trading. This is important because foreign investors have been withdrawing large amounts from Indian equities, causing market instability.
How much have foreign investors withdrawn from Indian equities recently?
Foreign portfolio investors withdrew ₹44,166 crore from Indian equities in October 2026 alone, contributing to a total outflow of ₹3.04 lakh crore in 2026. This outflow is almost double the ₹1.66 lakh crore withdrawn during the entire year of 2025.
What factors are causing foreign investors to pull out?
Several factors have affected investor sentiment, including elevated crude oil prices, a stronger US dollar, and higher US bond yields. Additionally, the rise of artificial intelligence-driven rallies in North Asian markets and better risk-free returns in countries like the US have attracted foreign capital away from India.
What changes does SBI Research suggest besides abolishing LTCG tax?
Besides the LTCG tax proposal, SBI Research recommends clarifying withholding tax rules for external commercial borrowings (ECBs). They emphasize the need for clear benefits under Double Taxation Avoidance Agreements (DTAAs) to boost investor confidence and improve foreign currency inflows.
How would extending the holding period to 2-3 years affect investors?
Currently, LTCG tax benefits apply if equities are held for more than one year. SBI Research suggests increasing this period to two or three years to encourage longer-term investments. This change could reduce short-term speculative trading and promote market stability.
What sections of the Income Tax Act govern LTCG taxation on equities?
Tax expert Balwant Jain explains that Section 198 of the Income Tax Act, 2025, covers LTCG on listed equity shares and equity-oriented mutual funds where securities transaction tax (STT) has been paid. Gains up to ₹1.25 lakh are exempt, and gains above that are taxed at 12.5%. Section 197 covers LTCG on other capital assets, including global stocks and non-equity mutual funds, without the ₹1.25 lakh exemption.
What impact could these proposals have on India's financial markets?
If adopted, abolishing LTCG tax and extending the holding period could attract more long-term investors, reduce volatility, and stabilize foreign currency inflows. This would strengthen India's external accounts and improve overall market confidence.
