Goodbye LTCG tax? SBI says government can absorb ₹50,000 crore revenue loss as Budget 2027 hopes rise

SBI Research argues that weaker market returns have already reduced potential LTCG collections, making a complete withdrawal of the tax more affordable than earlier revenue figures might suggest.

Why SBI believes LTCG abolition is affordable

In its November 2 report, SBI Research argued that using FY25's LTCG collections as a benchmark for estimating the cost of abolition would be misleading.

The government collected approximately ₹1.3 lakh crore in LTCG tax during FY25, according to a parliamentary reply. However, SBI attributed these unusually high collections to strong stock market performance in the preceding financial year, when equities delivered returns of nearly 30%.

The situation has since changed considerably.

SBI noted that the average Nifty return over the FY25–FY27 period so far has been just 0.5%, while cumulative FII outflows have reached ₹4.8 lakh crore.

Based on its econometric model, SBI estimates LTCG collections at approximately ₹1 lakh crore in FY26 and just ₹40,000–50,000 crore in FY27.

Consequently, eliminating LTCG tax in FY28 could cost the government only 0.1–0.2% of GDP, making the proposal potentially compatible with the fiscal consolidation roadmap, the report argued.

Sitharaman acknowledges investors' concerns

The SBI assessment comes as Union Finance Minister Nirmala Sitharaman has indicated that she is willing to consider calls for changes in equity market taxation.

Speaking at the Financial Express Leadership Awards 2026 in Mumbai, Sitharaman acknowledged growing anxiety among retail investors and market participants over foreign fund outflows.

"Taxation is just one part of it, but I quite appreciate and also realise the sensitivity and the anxiety which is prevailing among retail investors and also among equity participants," she said.

The Finance Minister pointed out that India's tax structure was similar in 2023–24, when foreign investment inflows were substantially stronger.

"Circumstances have changed. Challenges have grown. More net FII outflows have happened," she said.

Acknowledging the calls for relief, Sitharaman added, "I'll consider all this."

However, she stopped short of announcing any specific tax changes.

What alternatives has SBI proposed?

Apart from outright abolition, SBI Research has suggested several measures to rationalise LTCG taxation.

The report recommends raising the annual LTCG exemption threshold from ₹1.25 lakh to ₹2 lakh and linking it to inflation.

It also proposes a graded taxation structure that rewards longer investment horizons, retaining the existing 12.5% rate for holdings of one to two years, reducing it to 5% for two to three years and eliminating the tax entirely for investments held beyond three years.

SBI also suggested increasing securities transaction tax (STT) by 50%, estimating that the measure could generate approximately ₹45,000 crore in additional revenue in FY28, potentially offsetting revenue losses from LTCG relief.

Can India afford tax cuts amid fiscal pressures?

The proposal comes as the government's fiscal position faces fresh challenges.

SBI estimates that the Centre's FY27 fiscal deficit could exceed the Budget Estimate by approximately ₹1.2 lakh crore, potentially reaching 4.7% of GDP against the budgeted 4.3%.

The pressures include revenue losses from excise duty cuts and higher fertiliser and petroleum subsidies.

Nevertheless, SBI believes stronger government cash balances and expenditure rationalisation could provide some fiscal flexibility.

Sitharaman has also emphasised balancing growth-supportive policies with fiscal discipline, saying, "We need to be fiscally prudent."

For investors, the debate signals growing attention to capital gains taxation ahead of the next Budget. However, SBI's proposals remain recommendations, and the government has not announced any decision to abolish or reduce LTCG tax.