According to SBI Research, the government can abolish long-term capital gains tax (LTCG) without affecting its fiscal consolidation roadmap. The potential revenue loss due to this is estimated to be only Rs 40,000 to 50,000 crore. This estimate is based on the FY 2025 collection of Rs. 1.3 lakh crore is much less. The stock market returned about 30% that year. SBI Research says that it would be wrong to consider this figure as a yardstick to assess the potential revenue loss due to the abolition of LTCG. Therefore, it would be wrong to say that abolition of capital gains tax will save the government Rs. 1.3 lakh crore of revenue will be lost, said the report.
SBI Research estimates that amid weak market returns and continued withdrawal of foreign investors, LTCG earnings in FY 2026 will fall to around Rs. 1 lakh crore, which in FY 2027 will decrease to Rs. 40,000 to Rs. 50,000 crores can be done. According to the report, the three-year average return of Nifty between FY202020202020202020 and FY2020202020202020202020 has been just. percent, while total withdrawals by foreign institutional investors (FIIs) stood at Rs. 4.8 lakh crore has been reached. SBI Research said that even if the government decides to scrap the LTCG tax, the revenue shortfall in FY 2028 would be only Rs. 40,000 to Rs. will be in the range of 50,000 crores.
According to the report, this amount would be around 0.1 percent to 0.2 percent of GDP, which the government can easily handle. We believe that even if all capital gains tax is abolished, the government will be able to absorb this loss. The argument comes at a time when the central government is under pressure over its financial data. SBI Research estimates the fiscal deficit in FY2027 to be Rs. 1.2 lakh crore could be higher because of reduction in excise duty, increase in fertilizer subsidy and increase in petroleum and LPG subsidy.
The report estimated the fiscal deficit at 4.7 percent of GDP, while it was estimated at 4.3 percent in the budget. It said that to prevent slippage from the fiscal deficit target, the government may need to rationalize expenditure, strengthen cash balances and borrow less than the budget. After ‘switches’ and ‘buybacks’, the government’s debt is at a budgeted Rs. 17.2 lakh crore down to Rs. 15.97 lakh crore has been reached. At the same time, SBI Research estimates that the central government’s cash balance (taking into account core liquidity) will be around Rs 8.5 lakh crore by the end of October 2026.
What can the LTCG framework change?
SBI Research has suggested several other options instead of keeping the current tax structure as it is.
The first option is to increase the LTCG exemption limit to the current Rs. 1.25 lakh and increase it with inflation. The report said the limit should be such that it reflects the growing number of retail investors and rising asset prices.
Another option is to provide leverage on long-term investment. According to SBI Research’s proposed framework, the current rate of 12.5% can be applied on gains from assets held for 1 to 2 years. Investments held for 2 to 3 years may attract 5% tax, while investments held for more than 3 years may attract zero (0%) tax.
The report also suggests that the government may raise the ‘Securities Transaction Tax’ (STT) to compensate for the revenue loss. It has been said that a 50 per cent increase in STT would bring about Rs. 45,000 crores additional revenue can be generated.
Under the proposed framework of the SBI revision, the LTCG exemption limit will be increased to Rs 2 lakh. The tax rate on investments held for 1 to 2 years will be 12.5 percent, the tax rate on investments held for 2 to 3 years will be 5 percent and the tax rate on investments held for more than 3 years will be zero (0%).
Under the STT proposal, the tax rate on equity deliveries may increase from 0.10 per cent to 0.15 per cent, while the rate on futures may increase to 0.075 per cent from 0.05 per cent. The tax rate on options may increase from 0.15 percent to 0.225 percent.
SBI Research says that if LTCG is abolished completely, it could increase market turnover – even if STT rates are raised gradually. According to the report, under the proposed structure, the STT collection would increase to Rs. 1.36 lakh crore, while at the current rate it will be Rs. It is estimated to be 0.91 lakh crore.
On Monday, Finance Minister Nirmala Sitharaman said the central government would “consider” foreign investors’ demand to review the tax structure on equity capital gains. According to reports, market regulator Sebi has also suggested the government to remove LTCG imposed on FIIs.
Tax deferral facility for mutual fund investors
The report also suggested that investors should be allowed to defer LTCG (Long Term Capital Gains) tax if the proceeds from the mutual fund are reinvested in an eligible equity mutual fund within 90 days. According to the report, the move could help investors move from low-yielding mutual funds to better-yielding schemes without paying any tax immediately.
SBI Research also argues that tax changes related to bank deposits should also be kept in mind while considering reforms in LTCG. If this is not done, the tax benefits available on equity investments may be much higher than the benefits available on bank deposits. This can destabilize the financial savings of households.
It has been proposed to increase the tax exemption limit on savings account interest from Rs 10,000 to Rs 20,000. Also, it has been suggested to change the existing ‘maturity based tax’ system and apply a flat tax rate of 15 per cent on term deposits. According to the report, the government’s revenue could fall by around Rs 12,000 crore due to these deposit-related proposals.
