LTCG Tax Reforms: Zero Tax After 3 Years, Higher Exemption Limit, Among 5 Key Suggestions By SBI Research

SBI Research has called for a broader review of India's capital gains taxation framework. In its latest report, SBI Research has outlined several proposals, including raising the long-term capital gains (LTCG) exemption threshold, introducing lower tax rates for investments held over longer periods and allowing tax deferral on reinvestment in eligible equity mutual funds.

The report also examined whether the government could afford to abolish LTCG tax altogether.

The suggestions come amid reports that the Securities and Exchange Board of India (SEBI) has proposed exempting investors from LTCG tax when they sell existing mutual fund investments to reinvest in other schemes

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Can The Government Afford To Abolish LTCG Tax?

SBI Research believes the government could potentially absorb the revenue loss from abolishing capital gains taxes, given the relatively modest collections expected in the coming years.

According to a Lok Sabha reply dated July 26, 2026, the government collected Rs 1.3 lakh crore in LTCG tax during FY25. However, SBI Research attributed the elevated collections partly to the strong stock market performance in the preceding financial year, when equities delivered returns of around 30%, prompting foreign investors to realise accumulated gains.

The research report noted that the Nifty's average annual return over the last three years, from FY25 to FY27 so far, stands at just 0.5%. Additionally, foreign institutional investors (FIIs) have recorded cumulative outflows of Rs 4.8 lakh crore.

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Based on its estimates, SBI Research expects LTCG collections of around Rs 1 lakh crore in FY26 and Rs 40,000-50,000 crore in FY27.

It estimates that abolishing LTCG tax could result in a revenue shortfall of around Rs 40,000-50,000 crore in FY28, equivalent to approximately 0.1-0.2% of GDP. SBI Research believes the government could accommodate this within its fiscal framework.

Five Key Suggestions To Reform LTCG Taxation:

1. Increase LTCG exemption limit

The existing LTCG exemption threshold of Rs 1.25 lakh should be reconsidered, SBI Research suggested. Instead of maintaining a fixed threshold, the exemption limit could be linked to inflation to reflect rising investment values and the expanding retail investor base.

2. Lower tax rates for longer investment periods

SBI Research has proposed a differentiated tax structure based on the investment holding period. Under this approach, investments held for more than 2-3 years could attract zero LTCG tax, compared with the existing 12.5% rate applicable to eligible long-term equity gains.

3. Review LTCG alongside STT

The report also suggested reviewing LTCG taxation alongside an increase in securities transaction tax (STT). SBI Research estimates that a 50% increase in STT could generate additional government revenue of around Rs 45,000 crore in FY28.

It also noted that a layered LTCG taxation structure could generate additional revenue, potentially offsetting some of the impact of tax concessions.

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4. Allow tax deferral on mutual fund reinvestments

Drawing a parallel with tax provisions applicable to property transactions, SBI Research proposed allowing investors to defer LTCG tax proportionately when redemption proceeds from mutual funds are reinvested in eligible equity mutual fund schemes within 90 days.

This would help investors to shift from lower-return mutual fund schemes to reasonable returns funds, without immediately triggering the entire tax liability.

5. Provide tax relief on bank deposits

Lastly, SBI Research also emphasised the need to rationalise taxation on bank deposits to ensure that incentives for equity investments do not become disproportionately attractive compared with traditional savings instruments. It proposed increasing the tax exemption limit on savings account interest from Rs 10,000 to Rs 20,000. The estimated revenue foregone would be around Rs 1,531 crore, assuming a 4% interest rate.

For term deposits, the report suggested replacing the existing tax treatment across different maturity periods with a uniform 15% tax rate. This could result in revenue foregone of approximately Rs 10,500 crore.

Together, the proposed changes to savings and term deposit taxation would result in an estimated revenue loss of around Rs 12,000 crore.

SBI Research believes these measures could strengthen banks' core deposit base, improve financial stability and help banks support growing credit demand from sunrise sectors and social commitments.

ALSO READ: Why Has SBI Research Called For Scrapping LTCG On Equities?

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