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No LTCG tax on equity, 2-3 years holding period: Why SBI Research has made these proposals

image Sangeeta Ojha
By Sangeeta Ojha

4 min read | Updated on October 13, 2026, 11:34 IST

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SUMMARY

SBI Research has called for abolishing long-term capital gains (LTCG) tax on equities and extending the holding period to two to three years to encourage long-term investment amid heavy foreign investor outflows.

No LTCG tax on equity, 2-3 years holding period SBI Research Report

The LTCG tax rate on listed equities and equity mutual funds is 12.5% on eligible gains exceeding the applicable exemption threshold.

Economists at State Bank of India (SBI) have urged the government to scrap LTCG tax on equities. In its Ecowrap report dated October 12, SBI Research said the move could help attract long-term foreign capital and reduce volatility in equity inflows.
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“The government must seriously look into anchoring hot money flows into equity segment by extending the holding period to say 2-3 years and abolishing the long-term capital gains tax for equity,” SBI Research said in its Ecowrap report released on Monday.

Why has SBI Research proposed Scrapping LTCG tax?

The proposal comes amid heavy foreign investor selling in Indian equities. Foreign portfolio investors (FPIs) withdrew ₹44,166 crore from Indian equities in October up to the date cited in the report, taking total outflows in 2026 to ₹3.04 lakh crore.

The withdrawals significantly exceeded the ₹1.66 lakh crore recorded during the entire year 2025, according to the report.

Elevated crude oil prices, a stronger US dollar and higher US bond yields have weighed on investor sentiment. The artificial intelligence-led rally in North Asian markets has also attracted foreign capital, while investors are finding relatively higher risk-free returns in markets such as the US.

What is the current LTCG tax on equity investments?

Long-term capital gains (LTCG) exceeding ₹1.25 lakh from listed equity shares and equity mutual funds are taxed at 12.5%, while short-term capital gains (STCG) are taxed at 20%. The LTCG tax applies to shares and equity mutual fund units held for 12 months or more.

The 12.5% LTCG tax rate applies to foreign portfolio investors (FPIs) on equity investments as well as domestic and retail investors.

The LTCG tax rate on listed equities and equity mutual funds is 12.5% on eligible gains exceeding the applicable exemption threshold. The Union Budget 2026 retained this rate.

Tax expert Balwant Jain said that under the Income Tax Act, 2025, Section 198 provides for taxation of long-term capital gains (LTCG) on listed equity shares and equity-oriented mutual funds on which securities transaction tax (STT) has been paid. Gains of up to ₹1.25 lakh are tax-free, while gains exceeding this threshold are taxed at 12.5%.

He said Section 197 covers LTCG from other capital assets, including global stocks and mutual fund schemes that do not qualify as equity-oriented funds, with gains taxed at 12.5% without the separate ₹1.25 lakh exemption.

SBI Research has proposed abolishing the tax for investors with a holding period of two to three years to encourage longer-term capital inflows into Indian equities.
However, this is a recommendation by SBI Research, not an announced government decision. The existing tax rules continue to apply unless the government changes them.
Meanwhile, under the Income-tax (Amendment) Ordinance, 2026, the government has exempted FPIs from income tax on interest and capital gains arising from investments in government securities (G-Secs), effective April 1, 2026.

How could the proposed change affect investors?

If adopted, the proposal could benefit investors who hold eligible equity investments for two to three years by removing the LTCG tax on qualifying gains. It is also intended to encourage longer investment horizons rather than short-term capital movements.

SBI Research has made the proposal primarily in the context of attracting more stable foreign investment into Indian equities. It has argued that policy changes could help reduce the risk of sudden foreign capital outflows that put pressure on the rupee.

The report also called for greater clarity on withholding tax provisions for external commercial borrowings (ECBs), particularly regarding benefits under Double Taxation Avoidance Agreements (DTAAs), as a measure to improve investor confidence.

SBI Research said such policy changes could help strengthen foreign currency inflows and improve the stability of India's external accounts.

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About The Author

image Sangeeta Ojha
Sangeeta Ojha is a business and finance journalist with experience across leading media platforms like Mint and India Today. She has built a reputation for covering a wide range of personal finance topics, including income tax, mutual funds, insurance, savings and investing.

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