SBI Research report suggests that the Indian government could abolish long-term capital gains tax without impacting fiscal goals, proposing structural changes to boost investor sentiment and attract foreign capital amid current market outflows.

Feasibility of Abolishing LTCG Tax

The government could abolish long-term capital gains (LTCG) tax across investor categories without significantly disrupting its fiscal consolidation plans, as the revenue loss may be limited to Rs 40,000-50,000 crore in FY28, according to a report by SBI Research. In its latest Ecowrap report, SBI Research said the potential revenue shortfall from scrapping the tax would amount to around 0.1-0.2 per cent of GDP, which the government could absorb while remaining on its fiscal glide path.

The report estimated LTCG collections at around Rs 1 lakh crore in FY26 and projected them to decline to Rs 40,000-50,000 crore in FY27. It noted that the Rs 1.3 lakh crore collected in FY25 was unusually high because the stock market had delivered returns of around 30 per cent in the preceding fiscal year, prompting foreign investors to realise their gains. SBI Research said the recent market environment was different, with the Nifty's average return over the last three years at just 0.5 per cent and cumulative foreign institutional investor outflows at Rs 4.8 lakh crore. "We believe the Government would be able to take this hit if hypothetically, the entire capital gains taxes were abolished," the report said.

Proposed Structural Tax Reforms

Alongside abolition, the report suggested changes to the broader capital gains tax structure. It recommended raising the annual LTCG exemption threshold from Rs 1.25 lakh to Rs 2 lakh and linking it to inflation to provide greater relief to retail investors. It also proposed lower tax rates for longer holding periods, suggesting that gains on investments held for two to three years could be taxed at 5 per cent, while holdings beyond three years could attract zero LTCG tax. The existing 12.5 per cent rate could continue for investments held between one and two years.

Revenue Compensation and Market Sentiment

To offset some of the revenue loss, SBI Research suggested increasing Securities Transaction Tax (STT) by 50 per cent, which it estimated could generate around Rs 45,000 crore in additional revenue in FY28. The report also proposed deferring LTCG tax on mutual fund redemptions when proceeds are reinvested in eligible equity mutual funds within 90 days.

SBI Research had first proposed the abolition of LTCG tax in its October 12 Ecowrap report, arguing that the move could help attract foreign capital and improve investor sentiment amid sustained foreign portfolio investor (FPI) outflows from Indian equities. It had also called for extending preferential tax treatment to investments held for two to three years to encourage longer-term capital commitments and make Indian equities more attractive to global investors.

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