Budget 2026: Markets eye capital gains tax relief as Samir Arora flags equity tax nuances

As the countdown to the Union Budget gathers pace, market attention is firmly fixed on whether the Finance Minister will offer any tax relief, particularly on capital gains. Equity investors, in particular, are watching closely for potential tweaks that could influence post-tax returns.

In a recent post on social media platform X, Helios Capital founder Samir Arora explained why comparisons between capital gains tax on equities and tax on interest income are often misleading. He argued that what ultimately matters for the government is not the headline tax rate, but the net tax collected after accounting for losses and offsets elsewhere in the system.

Arora noted that when an individual invests in debt instruments or fixed deposits and pays tax on interest income, there is typically a counterparty that reports the same amount as an interest expense, reducing its taxable income. “So the government does not benefit much in aggregate tax collection,” he said, as the tax paid by one entity is largely offset by tax savings claimed by another.

He extended this logic to futures and derivatives trading, describing it as a near zero-sum game. For every trader who makes a profit, there is usually another who incurs a corresponding loss. While the profitable trader pays tax on gains, the losing party can claim a deduction for the loss. As profits and losses broadly cancel out, Arora said governments can afford to levy relatively higher tax rates on derivatives without materially increasing the system-wide tax burden.

In contrast, Arora highlighted that long-term equity investing operates very differently. In cash equity markets, investors trade post-tax corporate earnings or dividend streams, which have already been taxed at the company level. When an investor realises capital gains, there is typically no counterparty claiming an equivalent, tax-deductible loss. Missed upside by a seller is an opportunity cost, not a claimable loss.

“As a result, governments worldwide collect far more from cash equity capital gains than is apparent at first glance,” Arora said, adding that comparisons with interest income tax are incomplete if they ignore levies such as the Securities Transaction Tax (STT), which further augment government revenues from equity markets.

Capital gains tax regime

The Union Budget 2024 had overhauled India’s capital gains framework with the aim of simplification and rationalisation. Indexation benefits were withdrawn, the long-term capital gains (LTCG) tax rate was reduced from 20% to 12.5% across asset classes, and the exemption limit for listed securities was raised from Rs 1 lakh to Rs 1.25 lakh. Holding periods were also streamlined into two broad categories—one year for listed securities and two years for other assets—reducing complexity and scope for disputes.

However, these changes also highlighted the need for further fine-tuning. With the new Income-tax Act on the horizon, Budget 2026 presents an opportunity for calibrated reforms to reinforce the LTCG regime and incentivise wider participation in capital markets.

An upward revision of the Rs 1.25 lakh exemption could improve post-tax outcomes for small and retail investors and encourage sustained equity participation, especially as household savings continue to shift towards financial assets. Beyond exemptions, a measured rationalisation of LTCG rates could strengthen India’s competitiveness as a long-term investment destination while preserving revenue certainty.

Further simplification could come from standardising holding periods across asset classes, such as adopting a uniform one-year threshold. In addition, selectively reintroducing limited or optional indexation for assets like immovable property and unlisted securities could help protect genuine long-term investments from inflation, particularly where holding periods remain at two years.

Taken together, these measures could deliver a more coherent, investor-friendly LTCG framework aligned with India’s evolving savings and investment landscape.