Capital gains tax and STT explained: What investors need to know ahead of Budget 2026

As the Union Budget 2026 approaches on February 1, investors are closely tracking whether the government will revisit capital gains taxation, a sensitive area that directly influences investment behaviour, market liquidity and long-term savings. For now, the capital gains regime continues to be governed by changes introduced last year, which sought to simplify tax rates across asset classes while significantly reducing the role of indexation.

Capital gains tax is levied on profits earned from the sale of capital assets such as equity shares, mutual fund units, real estate, bonds and other investments. The applicable tax rate depends on two key factors—the nature of the asset and the holding period, which determines whether gains are classified as short-term or long-term.

Short-term capital gains

For listed equity shares, equity-oriented mutual funds and units of business trusts, gains arising from assets sold within 12 months are treated as short-term capital gains (STCG), provided Securities Transaction Tax (STT) has been paid at the time of transaction. These gains are taxed at a flat rate of 20%.

For other asset classes, including real estate, unlisted shares, gold and non-equity investments, short-term gains are not subject to a separate concessional rate. Instead, they are added to the taxpayer’s total income and taxed according to the applicable income tax slab rates.

Long-term capital gains

Long-term capital gains (LTCG) arise when assets are held beyond a prescribed holding period—typically more than 12 months for listed equities and equity mutual funds, and over 24 months for property and certain other assets.

Under the current framework, listed equity shares, equity-oriented mutual funds and units of business trusts attract a tax of 12.5% on long-term capital gains exceeding ₹1.25 lakh in a financial year. Gains up to this threshold are exempt from tax.

In a significant shift aimed at simplifying the tax structure, property, unlisted shares and most other long-term assets are also taxed at 12.5%, but without the benefit of indexation. This marks a departure from the earlier regime where long-term gains on several assets were taxed at higher rates but allowed indexation to adjust for inflation.

For assets acquired before the changes took effect in July 2024, transitional or grandfathering provisions apply, offering limited protection against adverse tax impact. However, indexation is no longer the norm for long-term capital gains.

 

Exemptions through reinvestment

Despite these changes, the Income Tax Act continues to allow exemptions on long-term capital gains if sale proceeds are reinvested in specified assets, such as residential property or notified bonds, subject to conditions laid out in relevant sections. These provisions remain an important part of tax planning, particularly for property sellers.

What investors are watching in Budget 2026

With equity markets witnessing strong retail participation and real estate activity picking up across several urban centres, any tweaks to capital gains taxation could influence both investment decisions and transaction timing. Market participants are watching for signs of further simplification, rationalisation of exemptions, or measures aimed at improving ease of compliance and investor sentiment.

AMFI’s proposals on equity taxation

The Association of Mutual Funds in India (AMFI) has put forward a key recommendation to ease the tax burden on retail investors by raising the LTCG exemption limit on equity investments from ₹1.25 lakh to ₹2 lakh. According to the industry body, the current threshold has not kept pace with rising incomes, inflation and the growing participation of households in capital markets.

AMFI has also proposed a complete exemption on long-term capital gains from equity mutual fund investments held for more than five years. The aim is to promote long-term wealth creation and align tax policy with the government’s objective of encouraging financial savings and equity participation.

The mutual fund industry argues that incentivising longer holding periods could discourage premature redemptions driven by tax considerations, improve market stability and foster a more disciplined, goal-based investment culture among households.

Call for restoring indexation for debt mutual funds

Beyond equities, AMFI has urged the government to revisit the taxation of debt mutual funds. In 2023, long-term capital gains with indexation were removed for most debt funds, resulting in gains being taxed at the investor’s income tax slab rate regardless of holding period.

AMFI has proposed restoring LTCG with indexation for debt mutual funds held for over 36 months, arguing that it would improve post-tax returns, support senior citizens and conservative investors, and revive inflows into debt funds. The industry believes such a move would also strengthen the corporate bond market and encourage long-term fixed-income savings.

As Budget 2026 approaches, investors will be watching closely to see whether the government fine-tunes the capital gains framework to balance simplicity, revenue needs and long-term market development.