SBI Research suggests the government has the fiscal room to remove the long-term capital gains (LTCG) tax on equities to help curb significant foreign investor outflows. The proposal includes a 50% increase in the Securities Transaction Tax (STT) to offset an estimated revenue loss of up to ₹50,000 crore.
The central government has sufficient fiscal space to eliminate the long-term capital gains (LTCG) tax on equities, according to a recent report by State Bank of India (SBI) Research. The research note suggests that such a move could help stabilize market sentiment, which has been under pressure throughout 2026 due to heavy selling by foreign institutional investors.
Fiscal Impact and Proposed Offsets
SBI Research projects that abolishing the LTCG tax could result in a revenue loss of approximately ₹40,000 to ₹50,000 crore by FY28. Analysts note that this figure represents a manageable portion—between 0.1% and 0.2%—of the national GDP, fitting within the government’s broader fiscal consolidation plans. To neutralize this impact, the report recommends a 50% increase in the Securities Transaction Tax (STT), a measure expected to recoup roughly ₹45,000 crore.
While this mechanism aims to balance the government's books, investors should note that an increase in STT would raise transaction costs. This would primarily affect high-frequency traders and those who transact frequently, whereas the removal of LTCG tax would largely benefit long-term equity holders.
Addressing FII Outflows
Market volatility in 2026 has been exacerbated by aggressive selling from foreign institutional investors, who have pulled over ₹3 lakh crore from Indian equities year-to-date. This has placed significant pressure on the Nifty and other major indices. The proposal suggests that structural tax reforms, such as removing the LTCG tax, could help restore investor appetite and encourage more domestic participation in the equity markets.
Proposed Tiered Tax Framework
Beyond simply scrapping the tax, SBI Research advocates for a restructured framework for capital gains. The recommendation includes raising the annual LTCG exemption threshold from ₹1.25 lakh to ₹2 lakh, with a mechanism to link this limit to inflation to maintain its value over time. Furthermore, the report proposes a tiered system for long-term investments: a 5% tax rate for assets held between two and three years, and a complete tax exemption for investments held for more than three years.
Understanding the Risks and Next Steps
It is important for market participants to recognize that these suggestions are recommendations from a research body and do not reflect confirmed government policy. The ultimate decision rests with the finance ministry and will likely be considered during upcoming budget discussions.
Investors should also consider that while tax policies play a role, market sentiment remains influenced by global macroeconomic factors, such as volatile crude oil prices, fluctuations in the US dollar, and rising US bond yields. The primary monitorable for investors will be any official communication from the government or developments in the next Union Budget, as these will determine whether any such tax overhaul is actually implemented.