State Bank of India economists have made a forceful case for abolishing long-term capital gains tax on equities, saying the move could help deepen India's capital markets at a time when foreign investors are steadily reducing exposure. Their argument lands amid a difficult stretch for domestic equities, with foreign portfolio investors having withdrawn more than Rs 3 lakh crore so far this year, a pace that has sharpened debate over whether India is doing enough to keep long-term capital in the market.
The economists' recommendation is not merely a tax-policy suggestion; it is a broader warning about market competitiveness. In their view, India risks losing investment momentum if equity taxation remains a deterrent while global investors can choose from markets offering stronger technology-led growth stories and more favourable capital-allocation conditions. The absence of large, listed artificial intelligence-focused stocks in India has also become part of the discussion, with analysts increasingly noting that global funds seeking exposure to the AI theme have fewer direct options in the Indian market than in the United States and select Asian peers.
Tax Cut Debate
The call to eliminate long-term capital gains tax on equities reflects a belief that India should prioritise sustained market participation over incremental tax revenue from equity investors. Supporters of the proposal argue that long-horizon investors are more likely to commit capital if post-tax returns improve, especially in periods of volatility when sentiment is fragile. The economists' position suggests that the current tax structure may be amplifying caution among both domestic institutions and overseas investors.
The debate is especially relevant because equity markets are not operating in isolation. Rising global bond yields, shifting expectations around interest-rate cuts, and a stronger dollar have all made emerging-market assets more vulnerable to outflows. In that environment, even modest tax frictions can matter. The SBI economists appear to be arguing that India should use fiscal policy to reinforce its position as a destination for patient capital rather than rely solely on macroeconomic growth to attract inflows.
Foreign Outflows Mount
The scale of foreign portfolio investor selling has become one of the most closely watched signals in Indian markets this year. Outflows exceeding Rs 3 lakh crore have raised questions about whether valuations in some segments of the market have run ahead of earnings, and whether global funds are reallocating toward markets with stronger near-term technology exposure. The selloff has also highlighted the sensitivity of Indian equities to external capital, even as domestic mutual funds and retail investors have provided a partial cushion.
Market participants say the exodus is not driven by a single factor. A combination of expensive valuations, uneven corporate earnings, and the relative scarcity of globally dominant technology names has made India less compelling for some foreign investors. The AI factor is increasingly central to that conversation. While India remains one of the world's fastest-growing major economies, it has fewer listed companies that offer direct participation in the artificial intelligence buildout that is currently driving investor enthusiasm in global markets.
That gap matters because international portfolio managers often allocate capital not only by geography but also by theme. When a market lacks visible representation in a high-growth theme such as AI, capital can migrate elsewhere even if the broader economic story remains sound. The SBI economists' intervention suggests that tax reform could be one way to offset that structural disadvantage and improve the relative attractiveness of Indian equities.
Policy Signal For Markets
The proposal to scrap long-term capital gains tax would mark a significant policy shift if adopted. It would also raise a broader question for policymakers: whether India should use the tax system to encourage deeper equity participation, especially when the market is trying to broaden ownership and sustain long-term investment. Any such move would need to be weighed against revenue considerations and the government's wider fiscal priorities.
For now, the economists' recommendation is best understood as a signal of concern from within one of India's most influential financial institutions. It underscores the view that market support may require more than growth optimism and earnings recovery. In a year marked by heavy foreign selling, the message is that India must sharpen its investment case if it wants to retain global capital and compete for the next wave of thematic money.
The broader implication is clear: if India wants to remain a preferred destination for equity investors, it may need to rethink how taxation, market structure, and sectoral depth interact. The SBI economists are effectively arguing that removing long-term capital gains tax could be a powerful way to strengthen that case, particularly at a moment when foreign investors are looking elsewhere and the AI-driven global rally has yet to find a strong Indian equivalent.