Budget 2026: Investors Eye LTCG Tax Reforms to Boost Market Sentiment
With the Union Budget 2026 presentation just around the corner, discussions surrounding the long-term capital gains (LTCG) tax are intensifying among the investment community. There is growing anticipation that the government might introduce significant changes to both the LTCG tax rate and the current exemption limit of ₹1.25 lakh. Market experts widely believe that a reduction in the tax rate coupled with an increased exemption threshold could play a crucial role in improving market sentiment, which has been dampened by substantial selling from foreign institutional investors (FIIs) and ongoing geopolitical uncertainties.
Expert Insights on LTCG Tax Rationalization
Shashank Udupa, a SEBI-registered research analyst and Fund Manager at Smallcase, emphasized the need for tax reforms. "Market participation has been declining over the past few months due to a challenging market cycle. While the government has implemented various measures to stimulate the economy, reducing the LTCG tax back to the earlier rate of 10% and eliminating the securities transaction tax (STT) would significantly help in fostering a positive sentiment within the market," he stated.
Udupa further highlighted the impact of the current tax structure. "The triple tax system on capital markets is adversely affecting market sentiment. Although the government had ambitious revenue projections from capital markets, the lack of participation has resulted in revenues falling well below targets. FIIs have been net sellers in this market; a reversal of FII flows could address both the market downturn and the depreciating rupee," he added.
Understanding LTCG Tax and Recent Changes
LTCG tax is imposed on the sale of assets held for a specified minimum period. For stocks, gains realized after holding them for 12 months are classified as long-term. Consequently, when an investor sells stocks or units of equity mutual funds after one year, they become liable to pay LTCG tax.
In the context of recent direct and indirect tax reforms, the demand for rationalizing the LTCG tax has gained considerable momentum. Notably, in the Union Budget 2024, the government raised the LTCG tax rate to 12.5% while also increasing the exemption limit from ₹1 lakh to ₹1.25 lakh.
Market Expectations and Potential Impact
Market participants are optimistic that Finance Minister Nirmala Sitharaman will announce a reduction in the LTCG tax rate and an enhancement of the exemption limit in the upcoming budget. Sujan Hajra, Chief Economist and Executive Director at Anand Rathi Group, explained the potential benefits. "Lower taxes would enhance post-tax returns, making Indian equities more appealing to investors. Such a move could substantially influence investor behavior and capital inflows into the market," he remarked.
Ajit Mishra, SVP of Research at Religare Broking, also shared his perspective on the possible market reaction. "Any positive surprises, such as relief measures for market participants—including a securities transaction tax (STT) cut or adjustments to LTCG taxation—could serve as a positive trigger for the market," he noted.
Mishra elaborated on the historical context. "Previously, there were more favorable LTCG provisions under the earlier tax regime, which are not available currently. If the government introduces LTCG rationalization, it could encourage greater market participation. Such measures would likely act as a significant sentiment booster for the market," he concluded.
Disclaimer: This article is intended for educational purposes only. The views and recommendations expressed are those of individual analysts or broking firms and do not represent the opinions of Mint. Investors are advised to consult with certified experts before making any investment decisions, as market conditions are subject to rapid changes and individual circumstances may vary.
