SBI Research recommends LTCG on equities to be scrapped; calls for DTAA clarity

SBI Research has proposed changing both the holding-period incentive and the tax treatment for equity investments. It wants investors to remain invested for two to three years, instead of treating equities as a vehicle for quick gains. At the same time, it wants the government to abolish long-term capital gains tax on equity.

The proposal uses a simple mechanism. A longer expected holding period could discourage rapid buying and selling by foreign investors. Removing LTCG tax could make longer-term equity investment more attractive. Together, these steps are intended to make foreign capital flows steadier rather than vulnerable to abrupt exits.

Foreign portfolio investors currently face a 12.5% LTCG tax on equities. SBI Research made its proposal as foreign investors sold Rs 44,166 crore of Indian equities in October and withdrew Rs 3.04 lakh crore during 2026. The report links more stable inflows with reduced pressure on the rupee and stronger external-account stability.

Long-term capital gains tax is a tax on profit from selling an equity investment after it has crossed the legally defined long-term holding period. The tax applies to the gain, not the full sale value. The article reports that foreign portfolio investors currently face a 12.5% LTCG tax on equity investments, including listed shares and equity mutual funds.

Short-term capital gains come from selling an equity investment before that long-term threshold. In India’s current framework, listed equity is generally treated as short term when held for 12 months or less, while longer holdings qualify as long term. Short-term gains use a separate tax rule, and the article does not provide its rate. The distinction is based mainly on holding duration.

SBI Research wants the long-term equity tax removed, while extending the proposed holding period to two or three years. Its aim is to reward patient investment and reduce quick foreign-money exits. The Budget 2026 retained the 12.5% LTCG rate for listed shares and equity mutual funds.

Foreign portfolio investor outflows have reached an unusually large scale in 2026. The latest selling took total withdrawals from Indian equities to Rs 3.04 lakh crore. That figure is substantially higher than the Rs 1.66 lakh crore withdrawn during the whole of 2025.

The pace is visible in the October figures. Foreign investors sold Indian equities worth Rs 44,166 crore so far in October. This pushed their overall 2026 withdrawals above Rs 3 lakh crore. The comparison shows that selling in 2026 has already exceeded the previous year’s full-year total, even before 2026 has ended.

The article links the selling to elevated crude oil prices, a stronger US dollar, rising US bond yields, and an artificial-intelligence-driven rally in North Asian markets. SBI Research says these pressures make foreign flows less stable. It is therefore proposing tax and repatriation changes to encourage longer-term investment and support the rupee.

A longer holding period can reduce the speed at which foreign money enters and leaves equity markets. If investors plan for two or three years, they may be less inclined to react to every change in bond yields, currencies, or commodity prices. Abolishing LTCG tax could also improve the after-tax return from holding equity for the longer period.

The mechanism works through investor behaviour and currency demand. Large equity sales usually involve converting rupees into foreign currency before money leaves India. If fewer investors sell abruptly, the market may face less sudden foreign-currency demand. More stable inflows can similarly provide steadier support for the rupee, rather than creating sharp swings.

The proposal is not a guaranteed cure for currency pressure. Foreign investors have withdrawn Rs 3.04 lakh crore from Indian equities in 2026, amid global pressures. SBI Research says tax changes should complement RBI measures and broader reforms concerning capital inflows, export proceeds, and external borrowing.

Foreign investors compare Indian equities with opportunities elsewhere. Rising US bond yields offer comparatively higher risk-free returns, making risky assets such as Indian shares less compelling. A stronger US dollar can also increase the appeal of dollar-based investments. Elevated crude oil prices add another concern for India, according to the report’s explanation of current investor sentiment.

Capital is also being drawn toward North Asian markets by an artificial-intelligence-driven rally. Experts cited in the report say India lacks stocks linked to the artificial-intelligence theme. Investors seeking exposure to that trend may therefore find more suitable opportunities in those markets. These choices can redirect foreign money even when India’s domestic prospects remain important.

The combined effect has been heavy selling. Foreign investors sold Rs 44,166 crore of Indian equities in October, taking 2026 outflows to Rs 3.04 lakh crore. SBI Research wants policy changes that encourage longer-term positions and make foreign capital flows less vulnerable to global shifts.

Double Taxation Avoidance Agreements, or DTAAs, are agreements between countries that allocate taxing rights and help prevent the same income from being taxed twice. They can set different treatment from a country’s general domestic rules. For cross-border borrowing, that treatment may affect the tax deducted from interest payments.

External commercial borrowings currently face withholding tax ranging from 5% to 20%, according to the article. Withholding tax is deducted at the payment stage before income reaches the overseas recipient. SBI Research wants clearer rules so borrowers can receive benefits available under DTAAs and tax authorities can apply general and specific provisions consistently.

The practical issue is uncertainty. If borrowers cannot tell which rate or rule applies, financing costs and compliance risks become harder to assess. SBI Research says clarity would build investor confidence. Its recommendation is part of a wider package covering capital inflows, export-proceeds repatriation, and longer-term foreign investment in India.

Foreign capital flows connect a country’s financial markets with the global economy. Inflows bring foreign currency into the country and can support investment in assets such as equities. Outflows reverse that process. When large sums leave quickly, demand for foreign currency can rise, placing downward pressure on the domestic currency.

These movements also affect the balance of payments, which records a country’s transactions with the rest of the world. Stable inflows can help finance external needs, while persistent outflows reduce that support. For example, foreign investors have withdrawn Rs 3.04 lakh crore from Indian equities in 2026. Such selling can increase market volatility and currency pressure.

Financial stability depends partly on whether flows are steady or abrupt. The report notes RBI measures to arrest depreciating trends in the rupee and urges government action on structural issues. Its proposals seek longer-term equity positions, quicker export-proceeds repatriation, and clearer ECB tax rules to strengthen external-account stability.