The government has sufficient fiscal space to absorb the revenue loss from abolishing long-term capital gains (LTCG) tax, with the potential impact estimated at just Rs 40,000–50,000 crore in FY28, according to SBI Research report.
The report argues that even a complete abolition of LTCG tax could be accommodated within the government’s fiscal consolidation roadmap, as tax collections from capital gains are likely to decline significantly amid subdued stock market returns.
SBI Research estimates that LTCG tax collections could fall to Rs 40,000–50,000 crore in FY27 from approximately Rs 1 lakh crore in FY26 and Rs 1.29 lakh crore in FY25.
“We believe the Government would be able to take this hit,” the report said, referring to the hypothetical abolition of capital gains taxation.
The report noted that the elevated collections in FY25 were partly attributable to strong stock market returns of nearly 30 percent in the preceding fiscal year, which encouraged foreign institutional investors to realise accumulated gains.
However, market conditions have changed considerably since then.
Higher exemption limit, zero tax after three years proposed
Apart from examining complete abolition, SBI Research suggested restructuring the existing LTCG framework to encourage long-term investments while protecting government revenue.
It proposed increasing the annual exemption threshold from the current Rs 1.25 lakh to Rs 2 lakh, with future adjustments linked to inflation.
Under a proposed differentiated tax structure, gains on investments held for one to two years would continue to attract the existing 12.5 percent rate, while those held for two to three years could be taxed at 5 percent.
Investments held for more than three years could be exempted entirely from LTCG tax, rewarding investors who remain invested for longer periods.
The report also recommended allowing investors to defer LTCG tax on mutual fund redemptions when the proceeds are reinvested in eligible equity mutual funds within 90 days.
Higher STT could offset revenue loss
SBI Research suggested that any reduction in LTCG taxation could be accompanied by an increase in securities transaction tax (STT) to protect government revenues.
According to its estimates, a 50 percent increase in STT rates could generate approximately Rs 45,000 crore in additional revenue during FY28, potentially offsetting much of the estimated revenue loss from LTCG abolition.
The report estimated that STT collections could increase from Rs 91,000 crore under existing rates in FY28 to Rs 1.36 lakh crore under the proposed structure.
Fiscal challenges persist
The proposal comes at a time when SBI Research expects the Centre’s fiscal deficit to exceed its FY27 Budget Estimate by approximately Rs 1.2 lakh crore.
The report projected the fiscal deficit at 4.7 percent of GDP, compared with the budgeted 4.3 percent, reflecting pressures from excise duty reductions, higher fertiliser subsidies and petroleum-related spending, alongside the impact of GDP base revision.
It estimated that fertiliser subsidies could exceed budgeted levels by Rs 90,000 crore, while petroleum and LPG subsidies could require an additional Rs 48,000 crore.
However, the report suggested that expenditure rationalisation and the government’s substantial cash balances could help contain fiscal pressures without necessitating additional market borrowing.
