The government may be able to abolish () without derailing its fiscal consolidation roadmap, with the likely revenue shortfall estimated at only Rs 40,000–50,000 crore, according to .




The estimate is significantly below the Rs 1.3 lakh crore collected in FY25, a year when the stock market had delivered returns of around 30%. Research said using that figure as the benchmark for the potential revenue loss from abolishing LTCG would be misleading.




“Thus, it is incorrect to say that the Government is going to lose Rs 1.3 lakh crore of revenue from capital gains tax,” the report said.




SBI Research estimates that would have been around ₹1 lakh crore in FY26 and may fall to Rs 40,000–50,000 crore in FY27, amid weaker market returns and sustained foreign investor outflows. The three-year average Nifty return between FY25 and FY27 so far is just 0.5%, while cumulative FII outflows have reached ₹4.8 lakh crore, according to the report.




“Even if we assume that if the Government decides to abolish , the shortfall for FY28 will be only in the range of Rs 40,000–50,000 crore,” SBI Research said.




That would amount to roughly 0.1%-0.2% of GDP, a hit the government could potentially absorb, the report said. “We believe the Government would be able to take this hit if hypothetically, the entire capital gains taxes were abolished.”




The argument comes as the Centre faces pressure on its fiscal arithmetic. SBI Research estimates that the FY27 fiscal deficit could exceed the Budget Estimate by around Rs 1.2 lakh crore, driven by the excise-duty cut, higher fertiliser subsidy and increased petroleum and LPG subsidies.




The report estimates the fiscal deficit at 4.7% of GDP, compared with the Budget estimate of 4.3%. It said the government may need to rely on expenditure rationalisation, stronger cash balances and lower-than-budgeted borrowings to contain the slippage.




Government borrowings have already fallen to Rs 15.97 lakh crore from the budgeted Rs 17.2 lakh crore following switches and buybacks, while SBI Research estimates the Centre’s cash balance, adjusted for core liquidity, at around Rs 8.5 lakh crore at the end of October 2026.



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What could replace the current LTCG structure?


SBI Research has proposed a series of options instead of retaining the existing tax structure unchanged.




The first is to raise the LTCG exemption threshold from the current ₹1.25 lakh and link it to inflation. The report said the threshold should reflect the widening retail investor base and rising asset prices.




The second option is to reward longer holding periods. Under the structure outlined by SBI Research, gains on assets held for one to two years could continue to attract the existing 12.5% rate. Holdings of two to three years could be taxed at 5%, while gains on assets held for more than three years could be taxed at zero.




The report also suggested that the government could raise the securities transaction tax to offset some of the revenue loss. A 50% increase in STT could generate around Rs 45,000 crore in additional revenue in FY28, it said.




SBI Research’s proposed structure would raise the LTCG exemption threshold to Rs 2 lakh, retain the 12.5% rate for one-to-two-year holdings, impose a 5% rate on two-to-three-year holdings and reduce the rate to zero for investments held beyond three years.




Under its STT proposal, the rate on equity delivery could rise to 0.15% from 0.10%, while the rate on futures could increase to 0.075% from 0.05%. The rate on options could rise to 0.225% from 0.15%.




SBI Research said a complete abolition of LTCG could also increase market turnover, even if STT rates were raised gradually. The report estimates that STT collections could rise to Rs 1.36 lakh crore under the proposed structure, compared with Rs 0.91 lakh crore under existing rates in FY28.




On Monday, Finance Minister Nirmala Sitharaman said the Centre would "consider" the request from foreign investors to review the structure of taxes levied on equity capital gains. According to reports, markets regulator Sebi has also recommended the government to remove LTCG imposed on FIIs.



Tax deferral for mutual fund investors


The report also proposed allowing investors to defer LTCG tax when redemption proceeds from one mutual fund are reinvested in an eligible equity mutual fund within 90 days.




Such a measure, it said, could help investors shift from low-return mutual funds to schemes offering better returns without facing an immediate tax liability.




SBI Research further argued that LTCG reform should be considered alongside tax changes for bank deposits. Without such adjustments, the tax incentives for equity investments could become significantly stronger than those for bank deposits, potentially distorting household financial savings.




It proposed raising the tax-exemption threshold on savings-account interest from Rs 10,000 to Rs 20,000. It also suggested replacing the current maturity-based tax treatment of term deposits with a flat 15% rate.




The combined revenue foregone from these deposit-related proposals could be around Rs 12,000 crore, according to the report.



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