SBI Research proposes five reforms to India's long-term capital gains tax

SBI Research has released a report calling for a comprehensive review of India's long-term capital gains (LTCG) tax framework. The think-tank proposes five key reforms: raising the current Rs 1.25 lakh exemption threshold and indexing it to inflation; introducing a tiered rate that would exempt gains on assets held for more than two to three years; reviewing LTCG tax in tandem with a 50% increase in securities transaction tax, which it estimates could generate about Rs 45 billion in FY28; allowing tax deferral when proceeds from mutual-fund redemptions are reinvested in eligible equity funds within 90 days; and expanding tax relief on bank deposits by doubling the savings-interest exemption and applying a uniform 15% rate to term-deposit interest.

The report notes that the government collected Rs 1.3 lakh crore in LTCG tax in FY25, a figure boosted by a strong equity market that year. It projects LTCG collections of roughly Rs 1 lakh crore in FY26 and Rs 40-50 billion in FY27, with a potential revenue shortfall of Rs 40-50 billion in FY28 if the tax were abolished – about 0.1-0.2% of GDP. SBI Research argues that this loss could be accommodated within the fiscal plan, especially if offset by higher STT revenues and a layered LTCG structure.

The institute argues that the suggested changes would broaden the tax base, support bank deposit growth, and improve financial stability while encouraging investment in equity markets.