Economists at State Bank of India, the country's largest lender by assets, put forward a recommendation in their Ecowrap publication that the holding period for equity investments be extended to between two and three years, with long-term capital gains tax on those holdings removed entirely, as a way to reduce the volatility created by overseas investors withdrawing funds from domestic equity markets.
Steadying the flow of overseas investment into equity markets — and narrowing the window for sudden, large-scale exits that would weigh on the rupee — sits at the heart of what the proposal sets out to achieve. The document acknowledged steps the Reserve Bank of India had taken to ease downward pressure on the rupee, noting that the central bank had deployed a broad package of interventions aimed at stabilising the currency's exchange value, while also calling on the government to move on longstanding structural matters related to capital inflows — an area where action had been delayed even as the external environment remained difficult.
Under the prevailing tax framework, equity holdings by foreign portfolio investors attract a long-term capital gains levy of 12.5%. Under the Union Budget 2026, the levy on listed shares and equity mutual funds held to the rate already put in place when a sweeping fiscal restructuring took shape in 2024.
Overseas institutional investors offloaded Indian equity holdings totalling Rs 44,166 crore through the first portion of October. Cumulative net outflows attributed to the group have now crossed the Rs 3 lakh crore threshold for the 2026 calendar period.
Three converging pressures — crude oil trading at elevated levels, a strengthening dollar, and climbing US Treasury yields — have weighed on the appetite of market participants. Overseas investment has been flowing into North Asian markets, pulled in part by a wave of enthusiasm around artificial intelligence technology.
Cumulative net selling by foreign portfolio investors against Indian equities has reached Rs 3.04 lakh crore so far in 2026, a figure that dwarfs the Rs 1.66 lakh crore pulled out across the entirety of 2025, according to data cited in the report. Ongoing selling pressure has been traced to a handful of converging forces: India's equity market holds few stocks tied to the artificial intelligence wave, while bond yields in places such as the United States have climbed to levels that hand investors a relatively attractive return without taking on added risk.
Among its other proposals, the document called for streamlining how export earnings are brought back into the country, with businesses given roughly six months to complete the transfer. According to analysis published by SBI Research, extending credit to foreign buyers for comparable timeframes is standard practice among exporters. Requests to push the repatriation window past the six-month mark would each be weighed on their own merits, the statement noted.
Boosting the flow of foreign currency into the economy and keeping India's external accounts on a stable footing are the twin goals driving these proposals. Among the adjustments SBI Research put forward were regulatory shifts designed to draw overseas investors toward longer holding periods, alongside a requirement that revenue earned from exports be repatriated within an acceptable timeframe.
Among the document's recommendations was a push for clearer guidance on the withholding tax rate applied to external commercial borrowings, a levy that spans a band of 5% to 20%. Clearer guidelines on how tax authorities should handle Double Taxation Avoidance Agreement provisions — both general and specific — were called for, with the aim of guaranteeing that borrowers can access the protections those treaties are designed to provide. Greater transparency on that front, the statement noted, would strengthen the confidence that investors place in the market.
