Zero Tax for 3-Year Equity? Union Bank's Bold Plan to Lure Global Investors
Union Bank of India suggests removing LTCG tax on equity held over 3 years to attract foreign capital and boost investor returns.
In a move that could potentially reshape the landscape for equity investors in India, Union Bank of India has proposed a significant overhaul of the Union Bank LTCG tax proposal. The bank suggests a complete tax exemption on long-term capital gains (LTCG) for equity investments held for more than three years, aiming to attract stable foreign capital and enhance overall investor returns.
A Push for Tax Rationalization
The proposal comes amid persistent demands from market participants to rationalize or entirely abolish LTCG taxes. According to the report, the bank recommends a tiered approach to taxation based on the holding period:
- Holdings beyond 3 years: Complete exemption from LTCG tax to encourage durable, long-term foreign investment.
- Holdings between 1 to 3 years: A reduction in the current 12.5 per cent tax rate.
To provide context, the current tax regime—effective since July 23, 2024, following the Union Budget 2024-25—imposes a 20% tax on short-term capital gains (STCG) and a 12.5% tax on LTCG for gains exceeding Rs 1.25 lakh in a financial year.
Boosting Household Savings and Bank Deposits
Beyond the stock market, Union Bank has also cast its eye on the savings accounts of common citizens. The report suggests reducing the tax on interest earned from bank deposits. Currently, higher-income savers face a tax rate of around 30% on this interest. The bank proposes lowering this to 15–20 per cent, or the applicable income-tax slab rate—whichever is lower—to make bank deposits more attractive and improve post-tax returns for households.
The Global Competition for Capital
The bank argues that India's strong economic growth alone isn't enough to secure global investment. It highlights that international investors prioritize returns measured in US dollars. To maintain sustained foreign capital inflows, India needs:
- Competitive risk-adjusted returns.
- Policy and currency stability.
- Deep structural reforms.
The report warns that defending the rupee is critical for macroeconomic stability, which might necessitate higher domestic interest rates. Consequently, the bank anticipates that the Reserve Bank of India (RBI) may need to raise the repo rate by 50–75 basis points by the end of FY27.
Addressing the "Durable Capital" Gap
While RBI measures like foreign currency non-resident (FCNR-B) deposits and external commercial borrowing (ECB) swap facilities have successfully mobilized approximately USD 143 billion, Union Bank points out a looming challenge: these funds must be repaid within the next three to five years. This makes the transition to more "durable" sources of capital imperative.
The report also highlights a stark disparity in foreign investment, noting the gap between gross foreign direct investment (around USD 97 billion) and net FDI (around USD 7 billion) in FY26.
Strategic Recommendations for a Better Investment Climate
To make India a more appealing destination for global money, the bank has suggested several structural tweaks:
- Faster Repatriation: Incentivizing exporters to bring back foreign currency proceeds before the nine-month deadline.
- Simplified Entry: Streamlining the registration process for Foreign Portfolio Investors (FPI).
- Taxation Shifts: Reviewing residence-based and source-based taxation, and potentially taxing foreign investors' returns in dollar terms rather than rupees.
- Long-term Goals: Strengthening domestic manufacturing, improving export competitiveness, and leveraging free trade agreements for long-term investment.
External Factors and the Rupee
The report concludes by noting that external geopolitical and economic shifts could provide relief. A softening of the US dollar and global bond yields—potentially following Republican Party losses in US midterm elections—could ease pressure on the rupee. Furthermore, a peace agreement between the US and Iran could push crude oil prices below USD 100 per barrel, reducing inflation and potentially shortening the US Federal Reserve's tightening cycle. However, the bank maintains that structural reforms remain the only path to a sustained recovery in foreign capital flows.