Key takeaways
- SBI Research estimates that abolishing long-term capital gains (LTCG) tax could cost the government approximately ₹40,000–50,000 crore in FY28.
- The potential revenue loss would represent around 0.1–0.2% of India’s GDP.
- LTCG collections were approximately ₹1.29 lakh crore in FY25, but SBI expects them to decline to ₹40,000–50,000 crore in FY27.
- The report proposes increasing the annual equity LTCG exemption limit from ₹1.25 lakh to ₹2 lakh.
- It also suggests reducing LTCG tax to 5% for investments held for two to three years and zero for holdings beyond three years.
- A proposed 50% increase in Securities Transaction Tax (STT) could generate approximately ₹45,000 crore in additional revenue in FY28.
- These are recommendations from SBI Research, not announced changes in government tax policy.
SBI estimates ₹40,000–50,000 crore revenue loss from LTCG abolition
Abolishing long-term capital gains tax may have a smaller impact on government revenue than previously assumed, according to a report by SBI Research.
The research unit estimates that completely removing LTCG tax could reduce government revenue by approximately ₹40,000–50,000 crore in FY28. This would represent around 0.1–0.2% of India’s GDP, an amount SBI Research believes the government could potentially accommodate within its fiscal consolidation framework.
The estimate comes amid discussions about making India’s equity markets more attractive to domestic and foreign investors. Foreign portfolio investors have withdrawn substantial amounts from Indian equities, while market participants have raised concerns about taxation and the relative attractiveness of investing in India.
SBI Research argues that the ₹1.3 lakh crore collected through LTCG tax in FY25 should not be used as the benchmark for estimating the cost of abolition. That year benefited from unusually strong stock market returns, which encouraged investors to realise accumulated gains.
The report therefore uses more recent market conditions to estimate the potential revenue impact.
Why SBI expects LTCG collections to decline
The difference between FY25 collections and the latest estimates is largely linked to stock market performance and investor activity.
The government collected approximately ₹1.29 lakh crore in LTCG tax during FY25. According to SBI Research, strong equity market returns of around 30% in the preceding financial year contributed to higher realised capital gains.
The situation has changed since then. Weaker stock market returns and sustained foreign investor selling have reduced the potential for large capital gains realisations.
SBI Research estimates that LTCG collections declined to approximately ₹1 lakh crore in FY26 and could fall further to ₹40,000–50,000 crore in FY27.
Estimated LTCG collections
| Financial year | LTCG collections |
|---|---|
| FY25 | Approximately ₹1.29 lakh crore |
| FY26 | Approximately ₹1 lakh crore |
| FY27 | ₹40,000–50,000 crore |
| FY28 | Potential revenue shortfall of ₹40,000–50,000 crore if LTCG is abolished |
FY26 and FY27 figures are SBI Research estimates. The FY28 figure represents the projected revenue impact of abolition, not an official government forecast.
The report also highlighted that the average Nifty return over the three-year period from FY25 to FY27 so far was approximately 0.5%. Cumulative foreign institutional investor outflows had reached around ₹4.8 lakh crore.
SBI Research believes that using FY25’s unusually high tax collections to calculate the cost of abolishing LTCG would therefore overstate the potential revenue loss.
What is LTCG tax in India?
Long-term capital gains tax is levied on profits earned when certain assets are sold after being held beyond a specified period.
For listed equity shares and equity-oriented mutual funds, the long-term holding period is generally more than 12 months, subject to applicable tax rules.
Under the current framework, qualifying equity-related long-term capital gains exceeding the annual exemption threshold of ₹1.25 lakh are generally taxed at 12.5%, excluding applicable surcharge and cess.
For example, consider an investor who sells eligible listed shares after holding them for more than one year and makes a capital gain of ₹3 lakh during the financial year.
| Particulars | Amount |
|---|---|
| Eligible long-term capital gain | ₹3,00,000 |
| Annual exemption | ₹1,25,000 |
| Taxable LTCG | ₹1,75,000 |
| Applicable tax rate | 12.5% |
| Indicative tax before surcharge and cess | ₹21,875 |
This example applies to eligible equity gains under the current framework. Different assets, holding periods and exemptions can have different tax treatments.
SBI Research’s proposal is broader than simply increasing the existing exemption. It examines whether the government should restructure or eliminate LTCG taxation to encourage longer-term investment.
SBI Research proposes zero LTCG tax after three years
Instead of retaining the current structure unchanged, SBI Research has suggested introducing tax rates linked to how long an investor holds an investment.
Under its proposed framework, investors holding eligible investments for longer periods would receive progressively lower tax rates.
Proposed LTCG tax structure
| Investment holding period | Current equity LTCG treatment | SBI Research proposal |
|---|---|---|
| 1–2 years | 12.5% for qualifying long-term gains | 12.5% |
| 2–3 years | 12.5% | 5% |
| More than 3 years | 12.5% | 0% |
The report also recommends increasing the annual LTCG exemption threshold from ₹1.25 lakh to ₹2 lakh and linking it to inflation.
This would allow the exemption to adjust over time rather than remaining fixed as asset prices and investment values change.
The underlying objective is to encourage investors to hold equity investments for longer periods instead of frequently selling them to book profits.
However, the suggested holding-period structure is a research recommendation and should not be confused with the current tax rules.
Can higher STT compensate for the revenue loss?
One of the report’s important recommendations is to review LTCG taxation alongside Securities Transaction Tax.
STT is charged on specified securities transactions, including equity delivery trades, futures and options. Unlike capital gains tax, it is linked to the transaction rather than the profit earned by an investor.
SBI Research estimates that increasing STT rates by 50% could generate approximately ₹45,000 crore in additional revenue during FY28.
This could potentially offset much of the revenue loss associated with LTCG abolition.
Proposed STT changes
| Transaction category | Existing rate | Proposed rate |
|---|---|---|
| Equity delivery | 0.10% | 0.15% |
| Futures | 0.05% | 0.075% |
| Options | 0.15% | 0.225% |
SBI Research estimates that STT collections could increase to approximately ₹1.36 lakh crore under the proposed structure, compared with around ₹91,000 crore under existing rates in FY28.
The proposal would therefore shift part of the government’s revenue collection from taxes on realised investment gains towards taxes on securities transactions.
However, higher STT could also increase trading costs for investors and market participants. Its effect on trading volumes and market liquidity would depend on how investors and institutions respond.
SBI proposes tax relief for mutual fund reinvestments
The report also suggests allowing investors to defer LTCG tax when they redeem one mutual fund investment and reinvest the proceeds in an eligible equity mutual fund within 90 days.
The idea is to make it easier for investors to move money between eligible schemes without immediately triggering the full tax liability.
Such a provision could provide flexibility to investors who want to shift from underperforming funds to other investment options.
SBI Research also argues that equity tax reforms should be considered alongside the taxation of bank deposits.
It has proposed increasing the tax-exemption threshold on savings-account interest from ₹10,000 to ₹20,000.
For term deposits, it has suggested replacing the existing maturity-based tax treatment with a flat 15% rate. The report estimates that the combined revenue impact of these deposit-related proposals could be approximately ₹12,000 crore.
The broader objective is to improve the attractiveness of bank deposits while restructuring the tax treatment of equity investments.
Government faces fiscal pressure despite potential tax relief
SBI Research’s assessment comes at a time when the Centre is also dealing with fiscal pressures.
The report estimates that India’s FY27 fiscal deficit could reach 4.7% of GDP, compared with the Budget Estimate of 4.3%.
It attributes the potential increase partly to lower excise-duty collections following duty reductions and higher fertiliser, petroleum and LPG subsidy requirements.
The research unit estimates that the fiscal deficit could exceed the Budget Estimate by approximately ₹1.2 lakh crore.
It also points to the government’s cash balances and lower-than-budgeted borrowing requirements as factors that could help manage the fiscal situation.
This makes the estimated ₹40,000–50,000 crore revenue impact from LTCG abolition relevant to the wider debate about balancing tax relief, investment incentives and fiscal discipline.
The Bigger Picture
SBI Research’s proposal highlights a possible shift in India’s approach to taxing investment gains. Instead of relying heavily on LTCG collections, the government could consider encouraging longer holding periods and recovering some revenue through transaction-based taxes. If implemented, the proposed changes could affect equity investors, mutual fund holders, brokers and market liquidity.
However, the estimated revenue loss is based on SBI Research’s projections, not an official government assessment. Abolishing LTCG would also require decisions about the treatment of different asset classes and investor categories. The government must weigh potential benefits for investment sentiment against fiscal requirements and the possibility that higher STT could increase trading costs.
Looking Ahead
The proposals could become part of the wider discussion around India’s capital gains tax framework, particularly as policymakers seek to attract foreign capital and encourage domestic household investment in financial markets. Investors will be watching for any formal announcements from the Finance Ministry, while the existing tax provisions remain applicable until the government officially changes them.
For now, SBI Research’s central argument is that the revenue cost of abolishing LTCG may be considerably lower than the FY25 collection figure suggests. Whether the government adopts complete abolition, a higher exemption threshold or a graded tax structure will depend on its assessment of market competitiveness, revenue requirements and the broader fiscal outlook.
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