Can Centre afford to abolish LTCG tax? Here’s what SBI report said on revenue loss

The government can afford to abolish long-term capital gains (LTCG) tax on investments across asset classes without derailing its fiscal consolidation path, according to a report by SBI Research.

The report said the potential revenue loss from scrapping the tax — likely to be ₹40,000-50,000 crore in FY28 — would be significantly lower than the ₹1.3 lakh crore collected by the government in FY25, given the subdued stock market returns and sustained foreign investor outflows have weighed on capital gains.

SBI Research estimates that LTCG collections would have been around ₹1 lakh crore in FY26 and could decline further to ₹40,000-50,000 crore in FY27.

"We believe the government would be able to take this hit if hypothetically, the entire capital gains taxes were abolished," the report said.

The report noted that the ₹1.3 lakh crore collection in FY25 was an unusually high figure due to strong stock market returns of around 30% in the preceding fiscal year, which prompted foreign institutional investors (FIIs) to realise gains accumulated earlier.

On the other hand, the average Nifty return over the last three years (FY25 to FY27 so far) has been just 0.5%, while cumulative FII outflows have reached ₹4.8 lakh crore, it said.

"Thus, the starting point of our analysis is that we should not start with ₹1.3 lakh crore revenue foregone as that gives a wrong precedence to compare," the report said.

It added that the government had achieved its fiscal consolidation target in FY26 despite lower capital gains tax collections.

The report also suggested a restructuring of the LTCG tax regime to encourage long-term investments while protecting government revenues.

It proposed raising the annual LTCG exemption threshold from the existing ₹1.25 lakh to ₹2 lakh and linking it to inflation rather than keeping it at a fixed amount.

For investments held for one to two years, the existing 12.5% tax rate could continue, while holdings for two to three years could attract a lower 5% rate. Investments held for more than three years could be exempted from LTCG tax, it suggested.

SBI Research also proposed increasing the securities transaction tax (STT) by 50% to compensate for the revenue loss from any reduction or abolition of LTCG tax.

“If government increase STT by 50%, then around Rs 45,000 crore extra revenue will be generated in FY28,” the report said.

“Also, if we introduce a layered LTCG taxation structure, there will be an additional revenue generation also,” it added.