LTCG, STT: Is It Opportune Time for FM Sitharaman to Relook at Taxation to Contain FIIs Selling in Indian Stock Market?

The question behind the headline is whether a tax change can slow foreign selling and FPI outflows. LTCG tax on equity is paid by FPIs and by domestic investors alike, so any change would affect every investor who sells shares or equity funds after a year.

This guide explains the SBI Research proposal, the FPI outflow numbers, the current tax and STT rates, what the government has said and what each outcome could mean. Where I calculate a figure myself, I label it.

Nothing has changed in the law, so continue to follow the current LTCG tax rules until the government announces otherwise.

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SBI Research and the LTCG Tax Proposal

Item	SBI Research proposal
LTCG tax on equity	Abolish it
Holding period	Extend to 2 to 3 years, to anchor hot money flows into equities
Export proceeds	Streamline repatriation within about six months
ECB withholding tax	More clarity on the 5% to 20% withholding tax, mainly for tax treaty benefits
Report	Ecowrap, dated 12 October 2026

The logic is that a tax-free gain after 2 to 3 years would reward long-term holders and discourage quick exits. SBI Research argues this would reduce the risk of sudden outflows that pressure the rupee and improve the stability of external accounts.

The report links the proposal to the pressure on markets from elevated crude oil prices, a stronger US dollar and higher US bond yields. An AI-led rally in North Asian markets has also drawn foreign money away, since India has few AI-themed stocks.

Risk: A proposal in a research report is not policy, and the tax can only change through the Budget or an amendment.

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FPI Outflows: The Numbers Behind the LTCG Tax Debate

Item	Figure	Note
FPI selling in October 2026	Rs 44,166 crore	Up to the report's cutoff date
FPI selling in 2026 so far	Rs 3.04 lakh crore	Reported by SBI Research
FPI selling in all of 2025	Rs 1.66 lakh crore	2026 is already higher
2026 versus 2025	About 83% higher	My calculation: 3.04 divided by 1.66

Outflows of this size explain why the LTCG tax is back in the discussion. Foreign investors pay the same 12.5% rate on long-term equity gains, and SBI Research believes a tax-free route could keep them invested longer.

A tax cut is only one of several drivers, though. The report itself lists crude oil, the dollar and US yields, so a change in the tax alone may not reverse the flow.

Risk: If US yields stay high and the dollar stays strong, outflows can continue even with a lower tax.

Current LTCG Tax and STT Rates on Equity

Item	Current rule
LTCG tax on listed equity and equity funds	12.5% on gains above Rs 1.25 lakh a year; holding period more than 12 months
Short-term capital gains (STCG)	20% on gains from holding up to 12 months
Budget 2026	Retained the 12.5% rate
STT on equity delivery	0.1%, unchanged
STT on equity intraday	0.025%, unchanged
STT on futures (sell side)	0.05% from 0.02%, effective 1 April 2026, as one source reports
STT on options premium (sell side)	0.15% from 0.10%, as one source reports

The STT rates come from one explainer on the 2026 Budget, so confirm them against the final Finance Act. The SBI proposal covered in the news is about long-term gains tax, and I did not find a specific STT change in it.

As an illustration, a gain of Rs 5 lakh on shares held for more than a year would attract tax of about Rs 46,875 (my calculation: Rs 3.75 lakh above the exemption at 12.5%), before cess and surcharge. Under the SBI idea, that tax would be nil.

Data note: Equity LTCG collections rose about 79% to Rs 1,29,158 crore in assessment year 2025-26 from Rs 72,249 crore, which shows how much revenue is involved.

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Government Stance on LTCG Tax and What Could Follow

Date	Statement or event
20 July 2026	Minister of State for Finance said in the Lok Sabha that no proposal is under consideration to abolish the LTCG tax for retail and domestic investors
12 October 2026	SBI Research report urges abolition and a 2 to 3 year holding period
13 October 2026	A related headline says the Finance Ministry has no proposal to scrap the LTCG tax on equities; I could not open the full text
1 April 2026	FPIs exempted from tax on interest and capital gains from government securities under an ordinance

The government has also said that capital gains rates are reviewed during the Budget. A change, if any, would most likely come then, and the revenue loss would need to be weighed against the FPI flow benefit.

The two sides are clear. Supporters of change say a longer holding period tied to a zero LTCG tax would reward patience, while critics say it would reduce revenue and mainly help large investors.

Risk: Policy talk can move markets in the short term, but without a government decision the LTCG tax rules remain as they are.

What to Watch Next on LTCG Tax

1. Any government response to the SBI Research proposal on LTCG tax
2. FPI flow data for the rest of October
3. Budget signals on capital gains rates and the holding period
4. Crude oil, the dollar and US yields, the other drivers of outflows
5. Any change in STT rates

Conclusion

SBI Research wants LTCG tax on equity scrapped and the holding period raised to 2 to 3 years to hold on to foreign money, but the government said in July that it has no such proposal. Investors should plan under the current rules and watch the Budget for any change.

Frequently Asked Questions

What has SBI Research proposed on LTCG tax?

Ans. It suggests abolishing LTCG tax on equity and extending the holding period to 2 to 3 years to anchor hot money flows.

What is the current LTCG tax on equity?

Ans. It is 12.5% on gains above Rs 1.25 lakh a year for listed equity and equity funds held for more than 12 months.

How much have FPIs sold in 2026?

Ans. FPIs withdrew Rs 3.04 lakh crore from Indian equities in 2026, including Rs 44,166 crore in October so far.

Has the government agreed to scrap LTCG tax?

Ans. No. The Minister of State for Finance said in the Lok Sabha on 20 July 2026 that there is no proposal to abolish it for retail and domestic investors.

What are the current STT rates?

Ans. STT on equity delivery is 0.1% and on intraday 0.025%. One source reports higher rates on futures and options from 1 April 2026.

Would abolishing LTCG tax stop FPI selling?

Ans. Not necessarily, since crude oil, the dollar and US yields also drive the flows.

Should I change my investing plan because of this?

Ans. Not until there is a government decision. Follow current rules and speak to a SEBI registered adviser or tax professional.

Is this article investment advice?

Ans. No. It is educational and not a recommendation.