With the Union Budget 2026 presentation just a few days away, chatter on the long-term capital gains (LTCG) tax is gaining momentum among investors. Hopes are high that the government will make some changes in the LTCG tax rate and the exemption limit of ₹1.25 lakh.
Experts believe a lower tax rate and increased exemption limit may influence market sentiment, which is weak due to massive selling by foreign institutional investors (FIIs) and geopolitical uncertainties.
They say a change in LTCG tax policy can significantly boost market sentiment, both domestically and among foreign investors.
“Since the last few months, market participation has been reducing due to a bad market cycle. While the government has taken many steps to revive the economy, reducing the LTCG to earlier 10% and removal of STT will really help create a positive sentiment in the market,” said Shashank Udupa, a SEBI-registered research analyst and Fund Manager at Smallcase.
“The triple tax system on capital markets is hurting market sentiment. While the government had ambitious projections to raise revenue from capital markets, due to a lack of participation, its revenue from those markets is well below target. FIIs have been net sellers in this market; a reversal of FII flow can fix both the markets and the falling rupee,” said Udupa.
Call for LTCG rationalization
LTCG tax is levied on the sale of assets held for a specified minimum period. On stocks, gains after 12 months are considered long-term. So, if an investor sells stocks or units of equity mutual funds after a year, an LTCG tax is levied.
Against the backdrop of recent direct and indirect tax reforms, the call for LTCG tax rationalization has grown stronger.
In the Union Budget 2024, the Union government increased the LTCG tax to 12.5%, while also increasing the exemption limit to ₹1.25 lakh from ₹1 lakh.
Market participants expect Finance Minister Nirmala Sitharaman to announce a cut in the LTCG tax rate and an increase in the exemption limit.
“Lower taxes would improve post-tax returns, which could make Indian equities more attractive. As a result, such a move could materially influence investor behavior and capital flows,” said Sujan Hajra, Chief Economist and Executive Director, Anand Rathi Group.
Ajit Mishra, SVP of Research at Religare Broking, believes that LTCG tax tweaks could lead to a positive market reaction.
“If there are any positive surprises, such as relief measures for market participants—like a securities transaction tax (STT) cut or changes to LTCG taxation—it could act as a positive trigger,” said Mishra.
“Earlier, there were more favorable LTCG provisions under the previous tax regime, which are not available now. If the government introduces LTCG rationalization, it could encourage greater market participation. Such measures could act as a sentiment booster for the market,” said Mishra.
Disclaimer: This story is for educational purposes only. The views and recommendations expressed are those of individual analysts or broking firms, not Mint. We advise investors to consult with certified experts before making any investment decisions, as market conditions can change rapidly and circumstances may vary.
