Zero Tax On 3-Year Holdings Or Complete Abolition? SBI Proposes Major LTCG Relief

The demand for Long-Term Capital Gains (LTCG) tax relief is dominating popular investing discourse in India. Following earlier requests for reviewing the tax structure by the State Bank of India (SBI), the Securities and Exchange Board of India (Sebi) has also recently batted for LTCG relief, according to multiple media reports.

Amid this growing consensus for providing investors with a more favourable tax environment, SBI has put forth a series of fresh proposals in its latest SBI Research Ecowrap, which seek to provide relief to the taxpayers who stay invested in the securities market with a long-term horizon.

Complete Abolition of LTCG Tax

In its report, SBI Research has suggested removing the capital gains tax entirely for all classes of investors due to muted market returns in recent months and foreign outflows.

The last three-year average Nifty return is 0.5 per cent (FY25 to FY27-to-date), and foreign institutional investor cumulative outflows are around Rs 4.8 lakh crore. The report claims that around Rs 1 lakh crore LTCG would have been collected in FY26 and Rs 40,000-50,000 crore for FY27.

Additionally, the government is also likely to have budgeted a lesser amount for FY27. Thus, the report states that even if the Government decides to abolish LTCG tax, the shortfall for FY28 will be only in the range of Rs 40,000-50,000 crore  or 0.1 per cent to 0.2 per cent, and the resulting revenue loss from scrapping the tax entirely would be easily absorbed by the exchequer.

"We believe the Government would be able to take this hit if hypothetically, the entire capital gains taxes were abolished," SBI Research said.

Inflation-Linked Exemption Threshold

If complete abolition is off the table, the bank recommends adjusting the base exemption limits. According to the report, the fixed limits currently in place fail to account for the influx of everyday citizens entering the equity markets.

"First, the exemption threshold should better reflect the widening retail investor base. Instead of a flat threshold amount (currently Rs 1.25 lakh), an inflation-linked threshold would be beneficial for investors," SBI Research said.

Tiered Taxation Rewarding Long-Term Investors

SBI Research also suggested an alternative time-based preferential treatment system to encourage market stability. The proposal outlined a sliding scale that reduces the tax burden down to zero for those who stay invested the longest.

"Second, longer investment horizons could merit preferential treatment. For example, if assets are held for more than 2-3 years, the LTCG may be 0 per cent as compared to 12.5 per cent for 1-2 years," SBI said.

STT Hike to Offset Revenue Foregone

To balance the fiscal maths of offering LTCG relief, SBI proposes a steep hike in trading taxes. Pushing trading costs higher would neutralise the impact of long-term tax cuts while increasing the cost of speculative trading and curbing it.

"Third, LTCG taxation should be reviewed together with STT. If the Government increases STT by 50 per cent, then around Rs 45,000 crore extra revenue will be generated in FY28," the report outlined.

Deferral of Tax on Mutual Fund Reinvestments

Drawing parallels to the sale of residential real estate, the report pushes for a rollover benefit on mutual funds. The mechanism could potentially prevent investors from being financially penalised simply for moving their capital into better-performing assets.

"In line with sale of property, in MF redemption, Government can defer LTCG tax proportionately, when the sale proceeds are reinvested in eligible equity MF within 90 days," SBI Research said.

While these tax-relief measures are expected to provide ease to investors and prompt them to stay invested for the long term, it remains to be seen whether the Centre will act on these proposals ahead of the Union Budget set to be announced in February 2027.