Union Finance Minister Nirmala Sitharaman announced on Tuesday that she intends to proceed with caution regarding taxation policies as the Union Budget approaches. Speaking at the 8th Bloomberg New Economy Forum in New Delhi, Sitharaman addressed the ongoing debate surrounding the long-term capital gains (LTCG) tax and the securities transaction tax (STT).
Debate Over Capital Gains and Market Impact
The Finance Minister acknowledged widespread commentary on the LTCG tax, noting that some market participants argue for the removal of one of these taxes due to perceived overlap. This discussion is set against a backdrop of significant foreign investor selling in the Indian equity markets. Foreign portfolio investors (FPIs) have withdrawn a substantial Rs 3,07,719 crore in 2026 alone, following outflows of Rs 1,66,286 crore in 2025. These persistent outflows have reportedly dampened market sentiment, impacting the five-year absolute returns of key indices like the Nifty and Sensex.
External Pressures and Fiscal Discipline
Sitharaman also highlighted external challenges contributing to pressure on the Indian rupee. However, she reassured investors about the government's commitment to fiscal discipline, emphasizing a prudent approach. Despite this, she conceded that the rupee's volatility against the US dollar remains a challenge the government is actively addressing.
SBI Research Calls for Tax Reforms
In a related development, SBI Research, in its latest Ecowrap report, advocated for the abolition of LTCG tax on equities. The report also suggested extending the equity holding period from the current one year to two or three years. These recommendations aim to stabilize short-term money flows into the equity market, a response to sustained foreign institutional investor (FII) outflows.
According to SBI Research, cumulative FPI outflows from the equity segment reached Rs 3.51 lakh crore between 2021 and September 2026, with 2023 being the sole exception to this trend. The report underscored a significant disconnect between foreign investors and the typical factors that support portfolio investment. It concluded that while the Reserve Bank of India (RBI) is navigating a challenging global environment, the government must urgently tackle long-standing structural issues affecting capital inflows.