SBI Research Advocates Abolishing LTCG Tax to Boost Investments
A new report from SBI Research suggests the government can eliminate long-term capital gains tax without major fiscal repercussions.
SBI Research estimates a revenue loss of Rs 40,000-50,000 crore from abolishing LTCG tax.
Proposed changes include raising the LTCG exemption threshold and reducing tax rates for longer holding periods.
An increase in Securities Transaction Tax could offset some revenue losses.
A recent report by SBI Research proposes that the Indian government could consider abolishing the long-term capital gains (LTCG) tax without significantly impacting its fiscal stability. The report indicates that the potential revenue loss from this move could be contained within Rs 40,000 to 50,000 crore for the fiscal year 2028, which represents a mere 0.1-0.2 percent of the country's GDP. This suggests that the government could manage this loss while adhering to its fiscal consolidation goals.
The report, part of SBI's Ecowrap series, highlights that LTCG tax collections are projected to decrease from an unusually high Rs 1.3 lakh crore in FY25 to approximately Rs 40,000-50,000 crore in FY27. This decline is attributed to a less favorable market environment, with the Nifty index showing an average return of only 0.5 percent over the past three years, coupled with substantial foreign institutional investor outflows totaling Rs 4.8 lakh crore.
In addition to the abolition of the LTCG tax, SBI Research recommends several reforms to the capital gains tax framework. These include increasing the annual exemption limit from Rs 1.25 lakh to Rs 2 lakh, with adjustments linked to inflation, which would provide greater relief to retail investors. The report also suggests implementing lower tax rates for investments held longer, proposing a 5 percent tax for gains on assets held for two to three years, and eliminating the LTCG tax for holdings beyond three years.
To mitigate the anticipated revenue shortfall, SBI Research proposes a 50 percent increase in the Securities Transaction Tax (STT), which could potentially generate an additional Rs 45,000 crore in FY28. Furthermore, the report suggests deferring LTCG tax on mutual fund redemptions if the proceeds are reinvested in eligible equity mutual funds within 90 days, thereby encouraging reinvestment in the market.
This proposal to abolish the LTCG tax is not new; it was first introduced in SBI's October 12 Ecowrap report. The rationale behind this recommendation is to attract foreign capital and enhance investor sentiment, especially in light of ongoing foreign portfolio investor outflows from Indian equities. By extending preferential tax treatment for investments held for two to three years, the report argues that the government could foster longer-term capital commitments and make Indian equities more appealing to global investors.
