Abolishing the LTCG tax would result in a loss of Rs 50,000 crore to the government exchequer, estimates SBI..
According to SBI Research, the government could abolish the Long-Term Capital Gains (LTCG) tax without impacting its fiscal consolidation roadmap. The potential loss in revenue is estimated to be only between ₹40,000 crore and ₹50,000 crore. This figure is significantly lower than the ₹1.3 lakh crore collected in the financial year 2025—a year in which the stock market delivered returns of approximately 30%. SBI Research notes that using that specific figure as a benchmark to estimate the potential revenue loss from abolishing the LTCG tax would be incorrect. Consequently, the report argues that it would be inaccurate to claim that the government would lose ₹1.3 lakh crore in revenue by eliminating the capital gains tax.
SBI Research estimates that, given weaker market returns and persistent outflows by foreign investors, revenue from the LTCG tax for the financial year 2026 would likely be around ₹1 lakh crore, potentially declining further to between ₹40,000 crore and ₹50,000 crore in the financial year 2027. The report highlights that the three-year average return for the Nifty index between FY2026 and FY2027 has been just 0.5%, while total outflows by Foreign Institutional Investors (FIIs) have reached ₹4.8 lakh crore. SBI Research further states that even if the government were to decide to abolish the LTCG tax, the resulting revenue shortfall in the financial year 2028 would remain within the range of ₹40,000 crore to ₹50,000 crore.
According to the report, this amount would represent approximately 0.1% to 0.2% of the GDP—a level that the government could easily manage. We believe that even if all capital gains taxes were to be abolished, the government would still be able to absorb the resulting revenue loss. This argument comes at a time when the central government is under pressure regarding its fiscal figures. SBI Research estimates that due to cuts in excise duties, an increase in fertilizer subsidies, and higher subsidies for petroleum and LPG, the fiscal deficit for the 2027 financial year could exceed the budget estimate by approximately Rs 1.2 lakh crore.
The report projects the fiscal deficit at 4.7% of GDP, compared to the 4.3% estimated in the budget. It suggests that to prevent a slippage from the fiscal deficit target, the government may need to rationalize expenditures, strengthen its cash balance, and borrow less than the amount stipulated in the budget. Following ‘switch’ and ‘buyback’ operations, the government’s borrowing has decreased from the budgeted Rs 17.2 lakh crore to Rs 15.97 lakh crore. Meanwhile, SBI Research estimates that by the end of October 2026, the central government’s cash balance (accounting for core liquidity) will stand at approximately Rs 8.5 lakh crore.
What could replace the current LTCG framework?
Instead of maintaining the existing tax structure, SBI Research has proposed several alternatives.
The first option is to increase the LTCG exemption threshold—currently set at Rs 1.25 lakh—and link it to inflation. The report suggests that this threshold should reflect both the growing number of retail investors and the rising prices of assets.
A second option is to provide benefits based on the duration for which an investment is held (holding period). According to the framework proposed by SBI Research, the existing tax rate of 12.5% could continue to apply to gains from assets held for 1 to 2 years. Investments held for 2 to 3 years could be taxed at 5%, while investments held for more than 3 years could be tax-exempt (0%).
The report also suggests that the government could increase the Securities Transaction Tax (STT) to compensate for any potential loss in revenue. It notes that a 50% hike in the STT could generate an additional revenue of approximately ₹45,000 crore in the financial year 2028 (FY28).
Under the framework proposed by SBI Research, the exemption limit for Long-Term Capital Gains (LTCG) would be raised to ₹2 lakh. A 12.5% tax rate would remain for investments held for 1 to 2 years, a 5% rate would apply to those held for 2 to 3 years, and the tax rate for investments held for more than 3 years would become zero (0%).
Regarding the STT proposal, the tax rate on equity delivery could increase from 0.10% to 0.15%, while the rate for futures could rise from 0.05% to 0.075%. For options, the tax rate could increase from 0.15% to 0.225%.
SBI Research suggests that if the LTCG tax were to be completely abolished, it could boost market turnover—even if STT rates were gradually increased. According to the report, under this proposed framework, STT collections could reach ₹1.36 lakh crore, compared to an estimated ₹0.91 lakh crore in FY28 under the current tax rates. On Monday, Finance Minister Nirmala Sitharaman stated that the central government would "consider" the demand from foreign investors to review the tax structure on equity capital gains. According to reports, the market regulator, SEBI, has also suggested to the government that the Long-Term Capital Gains (LTCG) tax levied on Foreign Institutional Investors (FIIs) be abolished.