Economists at State Bank of India have proposed removing the long-term capital gains (LTCG) tax for foreign investors to curb record equity outflows. Foreign portfolio investors have pulled over ₹3 lakh crore from Indian markets in 2026, driven by global market shifts and rising U.S. yields. This policy suggestion aims to restore market competitiveness and stabilize the rupee.
Economists at the State Bank of India (SBI) have called for the removal of the long-term capital gains (LTCG) tax on foreign portfolio investors (FPIs). This recommendation comes as the Indian stock market faces significant pressure from a massive exodus of foreign capital, which has reached over ₹3 lakh crore in 2026, far exceeding the total outflows seen in all of 2025.
Impact of the Current Tax Regime
The report, led by SBI’s economic research team, suggests that the current tax structure—which levies a 12.5% tax on long-term gains from listed equities and mutual funds—creates a barrier for international investors. The economists argue that this tax acts as a friction point that makes Indian markets less attractive, especially when compared to global alternatives. By eliminating or reducing this tax for foreign investors, the bank believes India could incentivize long-term commitment and attract patient capital back into the system.
Why Capital Is Moving Away
The record-breaking selling by foreign institutional investors (FIIs) is not happening in isolation. It is driven by a shift in the global macroeconomic environment. High crude oil prices, a strong U.S. dollar, and rising U.S. Treasury yields are pulling capital toward safer assets in the United States. Additionally, investors are increasingly diverting funds toward markets that offer high exposure to the artificial intelligence boom, particularly in North Asia. This global competition for liquidity has made India a net seller, contributing to volatility in the domestic market.
Strengthening Market Stability
This is not the first time policymakers have looked at tax adjustments to support market stability. In June 2026, the government introduced an ordinance to exempt FPIs from income and capital gains taxes on investments in government securities (G-Secs) to help support the currency and debt markets. SBI economists suggest that applying similar tax rationalization to the equity market could serve as a vital confidence-building measure.
Beyond tax reforms, the report highlights the need for better management of external accounts. This includes streamlining the processes for handling export proceeds and providing clarity on withholding taxes for external commercial borrowings. The goal is to make the regulatory environment more predictable for global investors who are currently navigating a competitive international climate.
What Investors Should Monitor
The primary risk currently weighing on the Indian economy is the persistent depreciation of the rupee against the U.S. dollar, fueled by these foreign outflows. While the call for tax removal is a policy suggestion rather than a government decision, investors should watch for any official commentary or potential policy shifts from the Finance Ministry or regulatory bodies. The long-term stability of the rupee and the depth of liquidity in Indian equities will remain the key monitorables for market participants as the year progresses.