In a recent Ecowrap report, SBI Research has advocated for significant reforms to India's equity market taxation policy. The key recommendations include abolishing the long-term capital gains (LTCG) tax on equities and extending the minimum holding period to 2-3 years from the current one year. This strategic shift is proposed to attract and anchor 'hot money' flows into the Indian equity market.
Addressing Persistent Foreign Outflows
The call for these changes comes amidst a concerning trend of sustained foreign equity outflows. Foreign investors have withdrawn a substantial Rs 3,07,719 crore in 2026 alone, following outflows of Rs 1,66,286 crore in 2025. This persistent selling pressure, totaling Rs 3.51 lakh crore from 2021 to September 2026, has weighed heavily on market sentiment, despite the Nifty and Sensex showing five-year absolute returns of 23 percent and 18 percent, respectively.
Soumya Kanti Ghosh, Group Chief Economic Adviser at SBI, highlighted in the report that a significant portion of foreign equity flows has recently favored primary market offerings over secondary market activity. He noted that the outflows in 2026 and 2025 demonstrated a 'complete detachment from portfolio investment enablers.'
Structural Changes for Capital Inflows
While the Reserve Bank of India (RBI) is actively managing a complex global environment, SBI Research emphasizes the urgent need for the government to address long-standing structural issues that impact capital inflows. The report suggests that building 'substantially low taxation moats' for allocators, particularly after a reasonable holding period of around three years, could significantly boost incremental flows.
According to the research, 'India Play' remains structurally attractive, and local blue-chip companies offer lucrative returns in a competitive market. By making the tax regime more favorable, India could enhance its appeal to global investors seeking stable and profitable opportunities.
Impact of Inflation and Yields
The report also touches upon broader economic factors, stating that if inflation remains sticky without a sharp economic downturn, persistent real-rate pressures and fiscal uncertainty could lead to an upward bias in long-term yields. This scenario would put long-dated bonds under price pressure and create headwinds for equity valuations, making the proposed tax reforms even more critical for market stability.
Clarity on Withholding Tax Also Needed
Beyond LTCG, SBI Research also called for greater clarity on withholding tax, which currently ranges from 5-20 percent (or lower for IFSC listings) for External Commercial Borrowings (ECBs). Improved clarity regarding benefits under Double Taxation Avoidance Agreements (DTAA) and consistent application of taxation clauses by authorities would serve as a confidence-building measure for foreign investors.