Exploring Four Strategies for Government to Eliminate LTCG Tax for All Investor Classes: Insights from SBI Report
The State Bank of India (SBI) has proposed measures for the government to eliminate the long-term capital gains (LTCG) tax without significantly impacting revenue collections. In its recent research report, SBI noted that the stock market had generated returns of approximately 30% in the previous financial year, prompting foreign investors to book profits. However, the market dynamics have shifted, with the Nifty’s average return over the last three years at just 0.5%, and foreign institutional investors withdrawing a total of Rs 4.8 lakh crore from Indian markets.
Potential Market Impact
SBI Research emphasizes that removing the LTCG tax could lead to increased market turnover over time, even if the securities transaction tax (STT) rate remains unchanged. Currently, STT collections are estimated at around Rs 73,000 crore for FY27, with potential growth in these receipts if LTCG taxation is gradually modified. The report highlights that the implications for market activity are a crucial factor in considering the abolition of LTCG.
Recommendations for Restructuring LTCG Taxation
SBI Research outlines several strategies for restructuring LTCG taxation. One suggestion is to revise the exemption limit, currently set at Rs 1.25 lakh, to align with inflation, ensuring it reflects the expanding retail investor base. Another recommendation is to provide more favorable tax treatment for long-term asset holders, potentially reducing the LTCG tax to zero for investments held for over two to three years, compared to the existing 12.5% rate for one to two-year holdings.
Additionally, the report suggests that any review of LTCG taxation could coincide with an increase in STT, estimating that a 50% rise could generate an extra Rs 45,000 crore in FY28. A tiered LTCG tax structure and allowing investors to defer LTCG tax on mutual fund redemptions, proportional to reinvested proceeds, are also proposed.
Fiscal Impact of Abolishing LTCG Tax
According to SBI Research, the government could eliminate the LTCG tax for all investor categories without severely affecting its fiscal targets. The report estimates a revenue loss of Rs 40,000-50,000 crore in FY28 if the LTCG tax is abolished, which would represent only 0.1-0.2% of GDP. The government could absorb this impact while maintaining its fiscal trajectory.
SBI projects LTCG tax collections at around Rs 1 lakh crore in FY26, with expectations of a decline to Rs 40,000-50,000 crore in FY27. The previous collection of Rs 1.3 lakh crore in FY25 was noted as an anomaly rather than a trend. The report argues that abolishing capital gains taxes could attract foreign capital back into Indian markets and enhance investor confidence, particularly as foreign portfolio investors have been withdrawing from domestic equities.
