Government has fiscal headroom to absorb Rs 50,000 crore revenue loss from LTCG
Benchmarks Nifty23,650.65209.86FEATURED FUNDS★★★★★Motilal Oswal Midcap Fund Direct-Growth5Y Return17.99 % Invest NowFEATURED FUNDS★★★★★UTI Aggressive Hybrid Fund Regular Plan-Growth5Y Return9.04 % Invest NowEnter search…
SBI Research indicates that eliminating the long-term capital gains tax may lead to a modest revenue decline, estimated to be between Rs 40,000-50,000 crore for FY28. The suggested reforms involve raising the exemption limits and introducing lower tax rates based on extended holding durations. Furthermore, an increase in the Securities Transaction Tax is expected to help mitigate some revenue losses, thereby fostering foreign investment and enhancing market confidence.
The government could abolish long-term capital gains (LTCG) tax across investor categories without significantly disrupting its fiscal consolidation plans, as the revenue loss may be limited to Rs 40,000-50,000 crore in FY28, according to a report by SBI Research.In its latest Ecowrap report, SBI Research said the potential revenue shortfall from scrapping the tax would amount to around 0.1-0.2 per cent of GDP, which the government could absorb while remaining on its fiscal glide path.
The report estimated LTCG collections at around Rs 1 lakh crore in FY26 and projected them to decline to Rs 40,000-50,000 crore in FY27. It noted that the Rs 1.3 lakh crore collected in FY25 was unusually high because the stock market had delivered returns of around 30 per cent in the preceding fiscal year, prompting foreign investors to realise their gains.
SBI Research said the recent market environment was different, with the Nifty's average return over the last three years at just 0.5 per cent and cumulative foreign institutional investor outflows at Rs 4.8 lakh crore.
"We believe the Government would be able to take this hit if hypothetically, the entire capital gains taxes were abolished," the report said.
Live Events
Alongside abolition, the report suggested changes to the broader capital gains tax structure. It recommended 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.
It also proposed lower tax rates for longer holding periods, suggesting that gains on investments held for two to three years could be taxed at 5 per cent, while holdings beyond three years could attract zero LTCG tax. The existing 12.5 per cent rate could continue for investments held between one and two years.
To offset some of the revenue loss, SBI Research suggested increasing Securities Transaction Tax (STT) by 50 per cent, which it estimated could generate around Rs 45,000 crore in additional revenue in FY28.
The report also proposed 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 that the move could help attract foreign capital and improve investor sentiment amid sustained foreign portfolio investor (FPI) outflows from Indian equities.
It had also called for extending preferential tax treatment to investments held for two to three years to encourage longer-term capital commitments and make Indian equities more attractive to global investors.
Add as a Reliable and Trusted News Source Add Now!
(You can now subscribe to our Economic Times WhatsApp channel)
Read More News onLTCG tax abolitionSBI Research reportfiscal headroommutual fund redemptionsSecurities Transaction Taxinvestment holding periodsforeign portfolio investor outflowscapital gains tax structureSBI Research
(Catch all the Business News, Breaking News and Latest News Updates on The Economic Times.)
...moreless(You can now subscribe to our Economic Times WhatsApp channel)
Read More News onLTCG tax abolitionSBI Research reportfiscal headroommutual fund redemptionsSecurities Transaction Taxinvestment holding periodsforeign portfolio investor outflowscapital gains tax structureSBI Research
(Catch all the Business News, Breaking News and Latest News Updates on The Economic Times.)
...morelessStories you might be interested in
Figures reflect the source report and its stated period. This article is for information and is not investment advice.
