SBI Research proposes abolishing LTCG tax, raising exemption limit to Rs 2 lakh

MUMBAI -- SBI Research has proposed the abolition of long-term capital gains tax, estimating the revenue loss at Rs 40,000-50,000 crore in FY28 -- equivalent to 0.1-0.2 per cent of GDP. The report, released as part of the Ecowrap series, argues the government could absorb this hit without significantly disrupting its fiscal consolidation plans.

The report notes that LTCG collections stood at Rs 1.3 lakh crore in FY25, an unusually high figure driven by approximately 30 per cent market returns in the preceding fiscal year, which prompted foreign investors to realise gains. Projections indicate collections will decline to Rs 40,000-50,000 crore in FY27 as market returns have moderated, with the Nifty's average return over the last three years at just 0.5 per cent.

Among the key proposals, SBI Research recommends 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. The report also suggests a tiered tax structure: a 12.5 per cent rate for investments held between one and two years, 5 per cent for holdings between two and three years, and zero tax for holdings beyond three years.

To offset some of the revenue loss, the report proposes increasing the Securities Transaction Tax by 50 per cent, which it estimates could generate approximately Rs 45,000 crore in additional revenue in FY28. The report also recommends 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 the move could help attract foreign capital and improve investor sentiment amid sustained foreign portfolio investor outflows from Indian equities totaling Rs 4.8 lakh crore.

The recommendations come at a time when foreign institutional investors have been net sellers in the Indian equity market, and the report suggests that tax reforms could improve investor sentiment and make Indian equities more attractive to global investors.