New Delhi [India], November 5 (ANI): The existing long-term capital gains (LTCG) tax on equity investments should be reduced, with a complete exemption for holdings beyond three years to attract more stable foreign capital and improve investor returns, according to a report by Union Bank of India.

Against the backdrop of ongoing calls from investors and market participants for rationalisation or abolition of LTCG tax, the bank recommended reducing the existing 12.5 per cent rate on equity investments held for one to three years.

For holdings beyond three years, it proposed a complete exemption from LTCG tax to encourage long-term foreign investment.

Currently, short-term capital gains (STCG) on listed equities are taxed at 20%, while long-term capital gains (LTCG) are taxed at 12.5% on gains exceeding Rs 1.25 lakh in a financial year. The revised capital gains tax rates came into effect on July 23, 2024, following changes announced in the Union Budget 2024-25.

The report also suggested reducing the tax on interest earned from bank deposits, currently around 30 per cent for higher-income savers, to 15-20 per cent or the applicable income-tax slab rate, whichever is lower. This, it said, could improve post-tax returns and encourage household savings through bank deposits.

The bank said India cannot depend on its stronger economic growth alone to attract global investors, as returns measured in US dollars play a more important role in investment decisions. Sustained foreign capital inflows would require competitive risk-adjusted returns, currency and policy stability, and deeper structural reforms.

'Given India's impossible-trinity trade-offs, defending the rupee-a key pillar of macroeconomic stability-may require higher domestic interest rates,' the report said.

It expects the Reserve Bank of India (RBI) to raise the repo rate by 50-75 basis points by the end of FY27 to support the rupee.

The bank noted that RBI measures to attract dollar inflows through foreign currency non-resident (FCNR-B) deposits and external commercial borrowing (ECB) swap facilities had mobilised around USD 143 billion. However, these flows would need to be repaid over the next three to five years, making it important to attract more durable sources of capital.

It also called for narrowing the gap between gross and net foreign direct investment, which stood at around USD 97 billion and USD 7 billion, respectively, in FY26.

To improve the investment environment, the report recommended faster repatriation of export earnings by incentivising exporters to bring back foreign currency proceeds before the existing nine-month deadline. It also called for simpler foreign portfolio investor (FPI) registration, reviewing source-based and residence-based taxation, and considering taxation of foreign investors' returns in dollar terms rather than rupees.

For the longer term, the bank stressed the need to improve export competitiveness, strengthen domestic manufacturing and convert free trade agreements into long-term investment opportunities.

The report further said pressure on the rupee could ease if the US dollar and global bond yields soften following the Republican Party's losses in the US midterm elections.

A potential US-Iran peace agreement could also bring crude oil prices below USD 100 per barrel, easing inflationary pressures and shortening the US Federal Reserve's tightening cycle. However, it said structural reforms would remain essential for a sustained recovery in foreign capital flows. (ANI)