SBI Research Urges Abolition of LTCG Tax to Stop Capital Flight
SBI Research suggests removing LTCG tax and extending holding periods to stop massive foreign investor outflows from Indian equity markets.
In a significant move to stabilize India's equity markets, SBI Research has recommended that the government abolish the Long-Term Capital Gains (LTCG) tax on equities. The research wing of India's largest lender argues that such a move, combined with an extended holding period, is essential to attract foreign capital and counter the massive outflow of funds by Foreign Portfolio Investors (FPIs).
The Massive Scale of Foreign Outflows
The call for structural reform comes in response to alarming data regarding how much money is leaving the Indian market. According to the latest Ecowrap report from SBI Research, FPI outflows in the equity segment reached a staggering Rs 3.51 lakh crore between 2021 and September 2026.
The report highlights a deepening trend of withdrawals:
- In 2025, outflows were recorded at Rs 1.66 lakh crore.
- In 2026, these outflows surged to over Rs 2.61 lakh crore.
- The report warns of potential "hot money" outflows reaching $13 billion in FY27.
SBI Research noted that while the Reserve Bank of India (RBI) has implemented monetary and foreign exchange interventions, these measures alone may not be enough to protect the rupee and manage the balance of payments if capital continues to flee the equity segment.
Proposed Solutions: Tax Breaks and Longer Holding Periods
To anchor these volatile "hot money" flows, the report suggests that the government must provide "sweeteners" on the taxation front. The primary recommendation is to create a low-taxation moat for investors who commit to the Indian market for the long term.
Specifically, the research suggests:
- Abolishing LTCG tax on equities to make Indian stocks more competitive globally.
- Extending the holding period to two or three years to encourage stable, long-term investment rather than speculative trading.
"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," the report stated, noting that India's blue-chip companies continue to offer lucrative return potential.
Addressing Currency and Investment Uncertainty
Beyond equity taxation, SBI Research also highlighted the need for greater transparency regarding withholding taxes on external commercial borrowings, which currently range between 5% and 20%. Providing clarity on these rates is seen as vital for boosting investor confidence.
While India's foreign exchange reserves are currently considered adequate even under stress, the report predicts that the balance of payments surplus could narrow to approximately USD 55-60 billion in FY27. This narrowing underscores the urgent need for policy interventions that transform India into a more attractive destination for sustained global capital.