LTCG Tax Abolition Feasible With STT Hike, Limited Fiscal Impact: SBI Research

The Government of India could abolish long-term capital gains (LTCG) tax across investor categories without significantly affecting fiscal consolidation, according to a report by SBI Research.

In its latest Ecowrap report, the research division estimated that removing the tax could result in a revenue loss of Rs 40,000-50,000 crore in FY28, equivalent to approximately 0.1-0.2% of gross domestic product (GDP).

The report suggested that the government could absorb this shortfall while maintaining its fiscal consolidation trajectory.

SBI Research estimated LTCG tax collections at approximately Rs1 lakh crore in FY26, with receipts projected to decline to Rs40,000-50,000 crore in FY27.

Collections reached Rs1.3 lakh crore in FY25, supported by strong stock market returns during the preceding financial year.

However, the report highlighted weaker recent market performance, citing average Nifty returns of 0.5% over three years and cumulative foreign institutional investor outflows of Rs4.8 lakh crore.

Alongside possible abolition, SBI Research recommended increasing the annual LTCG exemption threshold from Rs1.25 lakh to Rs2 lakh and linking it to inflation.

It proposed retaining the existing 12.5% tax rate for investments held between one and two years.

For holdings exceeding two years but not three years, the suggested rate is 5%, while investments held beyond three years could qualify for zero LTCG tax.

To compensate for reduced LTCG collections, SBI Research proposed increasing Securities Transaction Tax (STT) by 50%.

The report estimated that this adjustment could generate approximately Rs45,000 crore in additional revenue during FY28.

It also recommended deferring LTCG tax on mutual fund redemptions when investors reinvest the proceeds in eligible equity mutual funds within 90 days.

SBI Research initially proposed eliminating LTCG tax in its Oct 12 Ecowrap report.

It argued that the measure could improve investor sentiment, encourage longer investment horizons and attract foreign capital amid sustained portfolio outflows from Indian equities.

The proposals remain recommendations rather than announced government policy.