LTCG tax: Five changes proposed by SBI Research that could affect your stock and mutual fund investments

Amid a Reuters report suggesting that the Securities and Exchange Board of India (SEBI) has proposed exempting investors from LTCG tax when selling existing mutual fund holdings to reinvest in other schemes, SBI Research has also made a case for changes to India's capital gains taxation framework. Upstox could not independently verify the reported SEBI proposal.

1. Raise LTCG exemption limit to ₹2 lakh

SBI Research has proposed increasing the annual LTCG exemption threshold on eligible equity investments from the existing ₹1.25 lakh to ₹2 lakh.

"The exemption threshold should better reflect the widening retail investor base," the report said.

It has also suggested making the exemption limit inflation-linked rather than keeping it fixed.

2. Zero LTCG tax for investments held beyond three years

SBI Research has proposed a differentiated LTCG tax structure based on the investment holding period.

"Longer investment horizons could merit preferential treatment," SBI Research said.

Currently, qualifying listed equity shares and equity-oriented mutual fund units generally qualify for long-term capital gains treatment after a holding period of more than 12 months.

3. Defer LTCG tax on reinvestment in equity mutual funds

SBI Research has proposed allowing investors to defer LTCG tax proportionately when redemption proceeds are reinvested in eligible equity mutual funds within 90 days.

4. Increase STT by 50% to generate additional revenue

SBI Research has suggested reviewing LTCG taxation alongside Securities Transaction Tax (STT), with a 50% increase in STT rates proposed to compensate for potential revenue losses.

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

SBI Research has also suggested introducing a layered LTCG taxation structure to generate additional revenue.

5. What the proposals could mean for investors booking equity profits

If SBI Research's proposals are accepted, investors could have greater flexibility in deciding when to book equity profits. A higher annual exemption limit of ₹2 lakh could allow them to realise more gains without tax.

LTCG abolition could cost the government ₹40,000-50,000 crore

SBI Research has examined the potential revenue impact of completely abolishing LTCG tax.

The report notes that LTCG collections stood at approximately ₹1.29 lakh crore in FY25. However, SBI Research estimates that collections moderated to around ₹1 lakh crore in FY26 and could decline to ₹40,000-50,000 crore in FY27.

It cautions that the FY26 and FY27 figures are model estimates, as official LTCG collection figures are not separately published in the Budget documents.

Based on these estimates, SBI Research believes that abolishing LTCG tax could result in a revenue shortfall of approximately ₹40,000-50,000 crore in FY28, equivalent to 0.1–0.2% of GDP.

"We believe the Government would be able to take this hit," the report said.

What should investors note?

These are recommendations and not changes to the existing tax framework. Investors should continue to follow prevailing tax provisions until the government announces any changes.