SBI Research pitches LTCG tax abolition; flags Rs 1.2 lakh crore fiscal deficit risk

SBI Research has proposed a significant overhaul of India's taxation of financial savings, pitching the abolition of long-term capital gains (LTCG) tax on equities, higher securities transaction tax (STT) and enhanced tax incentives for bank deposits to rebalance household savings between financial markets and traditional banking instruments.

In its latest ECOWRAP report, Fiscal Maths Reveal Significant Challenges...May Be Cushioned by Borrowings Cut and Expenditure Rationalisation, dated November 2, SBI Research argues that the government could reconsider the existing LTCG framework while simultaneously increasing STT to protect revenue collections. It has also called for tax concessions on savings and term deposits to make bank deposits more attractive to households.

Proposal for tax adjustments for bank deposits

The proposals come against the backdrop of mounting fiscal pressures, with SBI Research estimating that the Centre's fiscal deficit for FY27 could exceed the Budget Estimate by around Rs 1.2 lakh crore.

"Finally, we also propose tax adjustments for bank deposits. Otherwise, the incentives for investment in equities would significantly outweigh the incentives for investment in bank deposits," the report said.

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Under the proposed changes, the exemption threshold for savings deposit interest could be increased from Rs 10,000 to Rs 20,000. SBI Research estimates that this would entail revenue foregone of around Rs 1,531 crore, assuming a flat tax rate of 4 per cent for its calculation.

For term deposits, the report proposes replacing the existing maturity-linked tax treatment with a flat 15 per cent rate across all maturities. It estimates revenue foregone of approximately Rs 10,500 crore from this measure. The combined revenue impact of the two deposit-related proposals could be around Rs 12,000 crore.

The report argues that such incentives could strengthen the banking system's deposit base, improve financial stability and help banks transmit the benefits of low-cost deposits to borrowers.

SBI Research has also suggested a complete abolition of LTCG tax on equities, arguing that the potential revenue loss may be manageable given the expected decline in collections. The current LTCG tax rate is 12.5 per cent on qualifying gains exceeding Rs 1.25 lakh annually.

The report estimates that LTCG collections could be around Rs 40,000-50,000 crore in FY27, significantly below the approximately Rs 1.29 lakh crore collected in FY25. It attributes the unusually high FY25 collections partly to a nearly 30 per cent stock market return in the preceding fiscal year.

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To compensate for the potential revenue loss, SBI Research has proposed increasing STT rates. For equity delivery transactions, the proposed rate is 0.15 per cent, against 0.10 per cent currently. For futures, it suggests 0.08 per cent, compared with 0.05 per cent, while the rate on options could rise to 0.23 per cent from 0.15 per cent.

According to the report's projections, the proposed STT changes could increase collections to Rs 1.36 lakh crore in FY28, against Rs 91,000 crore under existing rates, generating additional revenue of approximately Rs 45,000 crore.

However, higher transaction taxes could increase trading costs and affect market participation, making the actual revenue outcome dependent on trading volumes.

Fiscal deficit may exceed Budget estimate

Turning to the broader fiscal outlook, SBI Research estimates the Centre's FY27 fiscal deficit at Rs 18.2 lakh crore, or 4.7 per cent of GDP, against the Budget Estimate of Rs 16.96 lakh crore, or 4.3 per cent of GDP.

The projected deterioration is attributed to an estimated Rs 1.1 lakh crore revenue loss following excise duty changes, an increase of Rs 90,000 crore in fertiliser subsidies and around Rs 48,000 crore in petroleum and LPG subsidies.

SBI Research expects stronger GST growth and better disinvestment receipts to partly cushion the pressure. However, it sees net tax revenue at Rs 27.87 lakh crore, below the budgeted Rs 28.69 lakh crore.

Revenue expenditure is projected to increase to Rs 42.63 lakh crore from the budgeted Rs 41.25 lakh crore, while capital expenditure is estimated to remain unchanged at Rs 12.22 lakh crore.

"The only possible option with Government to contain fiscal deficit within Budget Estimates is to cut in expenditure," the report said.

Government cash balance offers temporary cushion

Despite the higher deficit projection, SBI Research believes the government may be able to manage its financing requirements without a corresponding increase in market borrowing.

The Centre's cash balance, adjusted for core liquidity, is estimated at around Rs 8.5 lakh crore as of October 26, compared with Rs 2.2 lakh crore at the end of October 2025. SBI expects this to decline to around Rs 2.5 lakh crore by March 2027.

The report notes that budgeted borrowing of Rs 17.2 lakh crore has already come down to Rs 15.97 lakh crore following switches and buybacks, a reduction of Rs 1.23 lakh crore.

The accumulated cash balance could therefore provide a temporary financing cushion and limit additional pressure on government bond yields.

LTCG collections and market activity under scrutiny

SBI Research's LTCG projections are based on a model incorporating Nifty returns, equity mutual fund investments and direct individual market investments.

The report estimates that around Rs 1 lakh crore of LTCG may have been collected in FY26 and Rs 40,000-50,000 crore in FY27. It also argues that weak equity returns could reduce realised capital gains.

It has suggested raising the LTCG exemption threshold from Rs 1.25 lakh to Rs 2 lakh, introducing preferential treatment for investments held for two to three years, and reviewing LTCG taxation alongside STT.

The report further proposes that the government defer LTCG tax proportionately when proceeds from property sales or mutual fund redemptions are reinvested in eligible equity mutual funds within 90 days.

SBI Research has also recommended increasing STT to protect revenue collections if LTCG is abolished, including a possible layered taxation structure.

Deposit mobilisation, fiscal consolidation remain key priorities

The report highlights the changing composition of household financial savings. Bank deposits accounted for 37.4 per cent of household financial savings in FY23, rising to 39.4 per cent in FY24 before declining to 32.7 per cent in FY25 and recovering to 35.5 per cent in FY26.

SBI Research believes tax incentives could help reverse the shift away from traditional deposits and strengthen banks' ability to fund credit growth.

Separately, the report estimates that the Centre's fiscal deficit could remain manageable through a combination of expenditure rationalisation, stronger receipts and lower borrowing requirements.

It also recommends a complete overhaul of the National Testing Agency (NTA) in the Budget.

While the LTCG abolition and STT revisions remain policy recommendations rather than announced government measures, the report places financial savings taxation at the centre of the broader fiscal policy debate ahead of the FY28 Budget.