Foreign portfolio investors (FPIs) have withdrawn a significant ₹3.51 lakh crore from Indian equities since 2021. This large outflow has raised concerns about the attractiveness of Indian markets for foreign investors. To address this, the research team at the State Bank of India (SBI) has suggested the government consider abolishing the long-term capital gains (LTCG) tax for investments held for 2 to 3 years. This move aims to attract more hot money—short-term speculative investments—into Indian equities.
- FPIs have pulled out ₹3.51 lakh crore from Indian equities since 2021.
- SBI Research recommends abolishing LTCG tax on holdings of 2-3 years to attract investments.
- Long-term capital gains above ₹1.25 lakh are currently taxed at 12.5%.
- Hot money refers to short-term investments seeking quick profits.
- Significant outflows occurred in 2025 and 2026, with ₹1.66 lakh crore and ₹2.61 lakh crore withdrawn respectively.
What is the current situation of FPI outflows in India?
Since 2021, foreign portfolio investors have withdrawn ₹3.51 lakh crore from the Indian equity market. The years 2025 and 2026 have seen particularly high outflows, with ₹1.66 lakh crore and ₹2.61 lakh crore withdrawn respectively. This trend indicates a detachment from portfolio investment opportunities in India, creating concerns about the sustainability of foreign investment in the market.
Why does SBI Research suggest abolishing the LTCG tax?
The SBI Research team, led by Soumya Kanti Ghosh, believes that abolishing the LTCG tax on holdings of 2 to 3 years will encourage more foreign investors to put money into Indian equities. Currently, long-term capital gains exceeding ₹1.25 lakh from listed equity shares and mutual funds are taxed at 12.5%. Removing this tax could make India a more attractive destination for hot money, which seeks quick returns and often moves rapidly in and out of markets.
What is hot money and why is it important?
Hot money refers to short-term, speculative capital that flows quickly into and out of markets to chase profits. These investments can significantly impact market liquidity and valuations. Attracting hot money can help boost the equity market by increasing demand for shares and supporting prices. However, excessive reliance on such capital can also lead to volatility.
How can tax incentives influence foreign investment flows?
Tax incentives like lowering or abolishing capital gains tax can encourage investors to commit funds for longer periods. SBI Research suggests that reducing taxation for a period of around three years could increase incremental flows into Indian equities. This would help stabilize the market and attract marquee investors, enhancing India's position as a competitive and lucrative investment destination.
What measures does SBI Research recommend to anchor hot money flows?
To stabilize and increase foreign investment, SBI Research recommends extending the holding period for LTCG tax exemption to 2-3 years and abolishing the tax for such holdings. Additionally, aligning investment themes with market opportunities and offering tax sweeteners could help anchor hot money in the equity segment. These measures aim to reduce volatility caused by rapid inflows and outflows and promote sustained investment.
Frequently Asked Questions
Q: What is the long-term capital gains tax rate in India?
A: Currently, long-term capital gains exceeding ₹1.25 lakh from listed equity shares and equity mutual funds are taxed at 12.5%.
Q: What is the meaning of hot money in the context of investments?
A: Hot money refers to short-term, speculative capital that moves quickly into and out of markets to seek quick profits.
Q: Why is SBI Research concerned about FPI outflows?
A: Large outflows by foreign portfolio investors can reduce market liquidity and investor confidence, affecting the stability and growth of Indian equities.
Q: How can abolishing LTCG tax attract more foreign investment?
A: Removing the LTCG tax on investments held for 2-3 years can make Indian equities more attractive by increasing post-tax returns, encouraging longer-term investment.
