RBI’s decisive steps on dollar inflows renew industry ask for LTCG tax relief on equities

On the face of it the math looks appealing! Consider this: if the past trends in rupee depreciation against the dollar has been around 3.5 per cent a year (given the higher figure of around 10 per cent over the past year as an exception given the extraordinary global uncertainties).

Against this, a yield of around 7 per cent on the debt instruments would mean a 3.5 per cent tax-free return. Attractive enough given the troubling global conditions. Analysts have been sharing various estimates of the capital inflows to be therefore expected with some predicting as much as $50 billion till March 2027. 

But then, what if there were to be a long term capital gains tax waiver on equities. After all, even the statement by RBI governor Sanjay Malhotra refers to bulk of FPI outflows in equities. “During April 1-June 2, 2026, net outflows from the equity and debt segments stood at 13.4 billion and US$ 0.3 billion, respectively,” explains the governor in the statement. 

Banking and financial sector head honchos, without wanting to be named, have maintained that the industry ask has consistently been to provide long term capital gains tax relief in equities while redefining long term as three to five years against one year at the moment.

The argument goes that a very small number (arguably hardly around 1 per cent) of retail investors buy government debt as against institutions, who tend to be the usual takers. Even here, if there were to be a three to five year capital gains tax relief on equity then major pension funds could invest in Indian equities and have a ripple effect in terms of net dollar inflows and also boost the domestic markets in the process. 

The renewed ask for relief on the Long-Term Capital Gains tax is also because today it is on top of Securities Transaction Tax on equities. This may be the need of the hour since global challenges have yet to abate. The war in the Middle East is still to conclude, movement of cargo ships is yet to be freed with the Strait of Hormuz still not open and ships continue to remain stranded. 

After all, other countries like South Korea and Taiwan have tried and given relief on long term capital gains for publicly traded equities and therefore hopes hinge now on India setting the tone on this with similar focussed measures in the equities arena. The measures announced by the RBI on Friday include the following: 

– For government securities under the Fully Accessible Route (FAR), expanding the universe of ‘specified securities’ by including all new issuances of 15-, 30- and 40-year tenor G-secs. In addition, limits pertaining to short-term
investment, concentration and individual securities on FPI investment under the
General Route are being removed. 

These measures along with the tax benefits provided by the government are expected to help attract foreign capital for government borrowing.

• The limits for investment by NRIs and OCIs in equity instruments traded on the stock market without SEBI registration are being increased. Further, the same facility is being extended to all individual Persons Resident Outside India
• (PROIs) at par with NRIs and OCIs.
• A facility of concessional forex swap will be provided till September 30, 2026 to incentivize ECBs by PSUs.
• A similar facility for bearing the full hedging cost shall be provided till September 30, 2026 to AD banks for raising fresh 3–5-year FCNR (B) deposits.
• It is also proposed to restore the time for realisation of export proceeds to nine
  months.

The RBI governor made it a point to emphasise that “while these measures are expected to strengthen our balance of payments, we will continue to make the right policy adjustments to further promote exports and attract and incentivise capital inflows.” And this is where new hopes hang and the industry while happy the policy took the first steps to attract foreign capital, it will build on this even further.