LTCG tax relief may cost Centre ₹50,000 crore in FY28, fiscal deficit to remain manageable: SBI Research

The Centre could consider abolishing long-term capital gains (LTCG) tax across asset classes, as the potential revenue loss of ₹40,000-50,000 crore in FY28 may be manageable within the government's fiscal consolidation roadmap, according to a report by SBI Research.

In its latest Ecowrap report, SBI Research said the estimated revenue loss would amount to 0.1-0.2% of GDP, giving the government room to consider rationalising or even scrapping LTCG taxation without significantly derailing its fiscal glide path. The report had first proposed the abolition of LTCG tax in an earlier edition published on October 12.

The report argued that the ₹1.3 lakh crore collected through LTCG tax in FY25, as disclosed in a Lok Sabha reply, should not be treated as the benchmark for estimating potential revenue losses. The unusually high collection was driven by a nearly 30% return in the stock market in the preceding fiscal year, which prompted foreign institutional investors (FIIs) to realise gains accumulated during FY24.

The current market environment is markedly different. The average Nifty return over the three-year period from FY25 to FY27 so far has been just 0.5%, while cumulative FII outflows have reached ₹4.8 lakh crore. SBI Research estimates LTCG collections at around ₹1 lakh crore in FY26 and ₹40,000-50,000 crore in FY27.

"Thus, even if we assume that the government decides to abolish LTCG tax, the shortfall for FY28 will be only in the range of ₹40,000-50,000 crore," the report said, adding that the government should be able to absorb the revenue impact.

SBI Research has also suggested a series of changes to the existing capital gains tax structure. These include replacing the current ₹1.25 lakh exemption threshold with an inflation-linked limit and providing preferential tax treatment for longer investment horizons. For instance, investments held for more than two to three years could attract zero LTCG tax, compared with the existing 12.5% rate for holdings of one to two years.

The report also suggested reviewing LTCG taxation alongside securities transaction tax (STT). A 50% increase in STT could generate an additional ₹45,000 crore in FY28, potentially offsetting the revenue loss from LTCG abolition. A layered LTCG taxation structure could also help generate additional revenue.

Another proposal involves allowing investors to defer LTCG tax proportionately when proceeds from mutual fund redemptions are reinvested in eligible equity mutual funds within 90 days.

Fiscal deficit may overshoot FY27 target

Separately, SBI Research estimates that the Centre's fiscal deficit in FY27 could exceed the Budget Estimate of 4.3% of GDP by around ₹1.2 lakh crore, reflecting the impact of tax cuts and higher subsidies.

The estimated fiscal pressure includes a revenue loss of ₹1.1 lakh crore due to the excise duty cut, an additional ₹90,000 crore in fertiliser subsidies and around ₹48,000 crore in petroleum and LPG subsidies. These structural pressures, along with the impact of the revised GDP base, could push the fiscal deficit to 4.7% of GDP on the 2022-23 base, around 40 basis points above the budgeted level, the report said.

The research firm expects stronger GST collections and better disinvestment receipts to partly cushion the impact. However, expenditure rationalisation, including a possible reduction in capital expenditure, could be necessary to contain the deficit.

During the first half of FY27, the Centre's tax and non-tax revenue receipts grew by 3.6-3.8% year-on-year, while total expenditure increased 10.7%. Consequently, the fiscal deficit rose 25% to ₹7.14 lakh crore.

SBI Research said the government could also use its stronger cash position to finance the wider deficit without increasing market borrowings. Its estimate of the Centre's cash balance, adjusted for core liquidity, stood at around ₹8.5 lakh crore at the end of October 2026, compared with ₹2.2 lakh crore a year earlier. The balance is expected to reach around ₹2.5 lakh crore by the end of March 2027.

Further, government borrowings have already declined by ₹1.23 lakh crore following switches and buybacks. Current borrowings stand at ₹15.97 lakh crore against the budgeted ₹17.2 lakh crore.

Tax relief for bank deposits

The report also called for changes in the tax treatment of bank deposits to arrest the decline in household financial savings flowing into the banking system. SBI Research proposed doubling the tax exemption threshold on savings account interest from ₹10,000 to ₹20,000. The estimated revenue foregone would be around ₹1,531 crore, assuming a flat 4% return.

For term deposits, it suggested replacing the existing maturity-based tax treatment with a flat 15% rate across maturities. This could result in revenue foregone of around ₹10,500 crore. The combined revenue impact of the proposed changes to savings and term deposits would be approximately ₹12,000 crore.