Government has fiscal headroom to absorb ₹50,000-crore revenue loss from scrapping LTCG tax: SBI Research

New Delhi - The Reserve Bank of India could forgo around Rs 40,000-50,000 crore in revenue if it eliminates the long-term capital gains (LTCG) tax across all investor categories, according to a report by SBI Research. The potential revenue loss represents 0.1-0.2 per cent of GDP, which the government could manage while staying on track with its fiscal consolidation goals.

The report estimated that LTCG collections would drop from Rs 1 lakh crore in fiscal year 2026 to Rs 40,000-50,000 crore in fiscal year 2027. SBI Research attributed the significant revenue decline to foreign investors' reduced gains in the Indian stock market, with the Nifty's average return over the past three years at just 0.5 per cent and foreign institutional investor outflows of Rs 4.8 lakh crore.

The research firm suggested that the government could absorb this hit by raising the LTCG exemption threshold to Rs 2 lakh and linking it to inflation. The report also proposed lower tax rates for longer holding periods, with gains on investments held for two to three years taxed at 5 per cent and zero LTCG tax for holdings exceeding three years.

Currently, the exemption threshold is Rs 1.25 lakh. To offset some of the revenue loss, SBI Research recommended increasing Securities Transaction Tax (STT) by 50 per cent, which could generate around Rs 45,000 crore in additional revenue in fiscal year 2028. The report also suggested deferring LTCG tax on mutual fund redemptions when proceeds are reinvested in eligible equity mutual funds within 90 days.

The idea of scrapping the LTCG tax was first proposed by SBI Research in its October 12 Ecowrap report, emphasizing that the move could attract foreign capital and improve investor sentiment amidst sustained foreign portfolio investor outflows from Indian equities.