Big good news likely on the horizon for LTCG! Will the tax be abolished after 3 years? This SBI report hints at potential relief..

LTCG Tax Relief Proposal: Investors in the Indian stock market may soon receive significant relief. SEBI recently put forward a proposal that, if implemented, could bring a positive turnaround to the market. Meanwhile, SBI Research has also presented a major proposal.

In its latest 'Ecowrap' report, SBI Research suggests that the government could abolish the Long-Term Capital Gains (LTCG) tax across all investor categories without causing any major disruption to its fiscal consolidation efforts. While this might result in a revenue loss of ₹40,000 to ₹50,000 crore for the government in FY28, such an impact would be manageable.

According to the report, the potential revenue loss from abolishing the tax would amount to only 0.1% to 0.2% of the GDP, ensuring that the government's fiscal targets remain unaffected.

Why is there a need to abolish the LTCG tax?

Citing data, SBI Research noted that tax collections rose to ₹1.3 lakh crore in FY25, largely driven by a 30% return in the stock market during the previous fiscal year. However, market conditions have since shifted:

Significant FPI outflows: Over the last three years, the Nifty has delivered an average return of just 0.5%, and Foreign Portfolio Investors (FPIs) have withdrawn approximately ₹4.8 lakh crore.

Projected decline in collections: LTCG tax collections are estimated to fall to ₹1 lakh crore in FY26 and further to ₹40,000–50,000 crore in FY27. Given this, a complete abolition of the tax would have a limited impact while potentially helping to attract foreign capital back into the market.

5 Key Recommendations from SBI Research

1. Zero tax after 3 years: The existing 12.5% ​​tax should continue to apply to investments held for a period of 1 to 2 years. A 5% tax should be applied to gains from investments held for 2 to 3 years, while investments held for more than 3 years should be exempt from Long-Term Capital Gains (LTCG) tax (0%).

2. Exemption limit of ₹2 lakh: To provide relief to retail investors, the annual LTCG exemption limit should be increased from ₹1.25 lakh to ₹2 lakh and indexed to inflation.

3. 50% increase in STT: It has been suggested that the Securities Transaction Tax (STT) be increased by 50% to offset the revenue loss resulting from the removal of the LTCG tax. This could generate an additional revenue of approximately ₹45,000 crore in FY28.

4. Reinvestment exemption for mutual funds: LTCG tax on mutual fund redemptions should be deferred, provided the proceeds are reinvested into a qualifying equity mutual fund within 90 days.

5. Encouraging foreign investment: In its report dated October 12, SBI Research first proposed the removal of the LTCG tax to curb persistent selling by Foreign Portfolio Investors (FPIs) and to boost the interest of global investors in Indian equities.