Govt Can Absorb Rs 50,000 Crore Hit if LTCG Tax is Abolished: SBI Research
SBI Research suggests the government can abolish LTCG tax without hurting fiscal goals, proposing STT hikes to offset revenue losses.
The Indian government possesses sufficient fiscal headroom to completely abolish the Long-Term Capital Gains (LTCG) tax across all investor categories without derailing its fiscal consolidation targets. According to a recent Ecowrap report by SBI Research, the potential revenue loss from such a move would be limited to approximately Rs 40,000 to Rs 50,000 crore by FY28.
Minimal Impact on GDP and Fiscal Path
The report highlights that the projected revenue shortfall would represent only about 0.1 to 0.2 per cent of the GDP. This relatively small figure suggests that the government could absorb the hit while remaining firmly on its fiscal glide path.
Analyzing the trends, SBI Research estimated that LTCG collections would be around Rs 1 lakh crore in FY26, before declining to the Rs 40,000-50,000 crore range in FY27. It is important to note that the Rs 1.3 lakh crore collected in FY25 was an anomaly, driven by an unusual 30 per cent stock market return in the previous fiscal year, which led foreign investors to realize significant gains.
A Shifting Market Landscape
The current market dynamics are starkly different from the previous peak. SBI Research pointed out that the Nifty's average return over the last three years has been a mere 0.5 per cent. Furthermore, the Indian equity market has faced a cumulative outflow of Rs 4.8 lakh crore from foreign institutional investors (FIIs).
By abolishing the LTCG tax, the report argues that India could improve investor sentiment and attract much-needed foreign capital, reversing the trend of sustained foreign portfolio investor (FPI) outflows.
Proposed Overhaul of the Tax Structure
Beyond total abolition, SBI Research has suggested several strategic modifications to the capital gains tax framework to benefit retail investors and encourage long-term commitments:
- Exemption Threshold: Raising the annual LTCG exemption limit from the current Rs 1.25 lakh to Rs 2 lakh and linking it to inflation.
- Tiered Tax Rates:
- Investments held for 1 to 2 years: Maintain the existing 12.5 per cent rate.
- Investments held for 2 to 3 years: A reduced tax rate of 5 per cent.
- Investments held beyond 3 years: Zero LTCG tax.
- Mutual Fund Relief: Deferring LTCG tax on mutual fund redemptions if the proceeds are reinvested into eligible equity mutual funds within a 90-day window.
Offsetting the Revenue Gap
To mitigate the financial impact of removing the LTCG tax, SBI Research proposed a solution to recover the lost funds. The report suggests increasing the Securities Transaction Tax (STT) by 50 per cent. This adjustment is estimated to generate roughly Rs 45,000 crore in additional revenue by FY28, effectively neutralizing most of the loss from the tax abolition.
"We believe the Government would be able to take this hit if hypothetically, the entire capital gains taxes were abolished," the report stated, emphasizing the need to make Indian equities more competitive on a global scale.