Union Budget 2026: Don’t expect LTCG rate cut; exemption hike more likely, says investment manager

As the Union Budget 2026 approaches, investor attention is increasingly focused on how the government may tweak the taxation of long-term capital gains (LTCG) on listed equities and equity-oriented mutual funds. While market participants have periodically called for a reduction in the LTCG tax rate, some investment professionals believe the government is more likely to adjust the exemption threshold rather than cut rates.

Investment manager Kirttan Shah has argued that official tax data points strongly in that direction. Citing Income Tax Department statistics in a recent LinkedIn post, Shah highlighted the sharp concentration of long-term capital gains among high-income earners. According to the data, total LTCG reported in Assessment Year 2023–24 stood at ₹8.58 lakh crore. Of this, nearly 80 per cent — around ₹6.9 lakh crore — was earned by taxpayers with annual incomes exceeding ₹5 crore. The concentration becomes even starker at lower thresholds, with about 90 per cent of total LTCG accrued to individuals earning more than ₹50 lakh a year.

Publicly available tax return data reinforces this skew. Just 191 taxpayers reporting LTCG of more than ₹5 crore accounted for roughly ₹3.74 lakh crore, or about 44 per cent of all reported long-term equity gains. At the other end of the spectrum, investors with gains below ₹1.5 lakh collectively earned only about ₹10,564 crore, with average gains of around ₹36,000 per return. This contrast underscores how sharply LTCG is tilted toward a small group of very high-income investors.

“Will your capital gains tax on stocks and mutual fund investing be reduced in the upcoming Budget? Let me explain the math you don’t know. The total long-term capital gains in AY 2023–24 (while dated, but still useful for perspective) was ₹8,58,022 crore. The interesting part is that 80 per cent of this — ₹6,90,370 crore — was earned by people with incomes of more than ₹5 crore that year. In fact, 90 per cent of these capital gains were earned by people with incomes above ₹50 lakh,” Shah wrote on LinkedIn.

He added, “Here, it is clear that most long-term capital gains are earned by the rich. If the government reduces the LTCG tax, the less rich benefit very little, while the rich benefit much more. Hence, the exemption of up to Rs 1.25 lakh on LTCG makes more sense because it directly benefits smaller investors, who pay no tax on LTCG up to that limit each year. Of course, reducing LTCG back to 10 per cent or lower — given that STT is already charged — would make sense and be positive for markets. But given how this government thinks, expect the Rs 1.25 lakh limit to increase, if at all, rather than the rate being cut from 12.5 per cent to 10 per cent.”

At present, long-term capital gains on listed shares and equity-oriented mutual funds are taxed at 12.5 per cent on gains exceeding Rs 1.25 lakh in a financial year, while gains up to that threshold remain exempt. For retail investors, this exemption acts as a crucial cushion, often shielding most or all annual equity profits from tax. Tax experts broadly agree that raising the exemption aligns with the government’s preference for progressive taxation. While a rate cut could boost market sentiment, it would also significantly reduce tax collections from a narrow group of high earners.

Against this backdrop, expectations for Budget 2026 are increasingly centred on a higher tax-free LTCG exemption rather than a rollback in rates.

Tax on mutual funds

When you invest in mutual funds, the returns you earn are taxed under India’s capital gains framework. The tax treatment depends mainly on two factors: the type of mutual fund you invest in—equity, debt or hybrid—and the holding period, or how long you stay invested. Understanding these rules is essential to plan investments efficiently and improve post-tax returns.

Mutual fund returns come in two forms: dividends and capital gains. Dividends are payouts from a fund’s income, such as interest or stock dividends earned by the portfolio. Earlier, these were tax-free in investors’ hands, but after the abolition of Dividend Distribution Tax (DDT), dividends are now added to the investor’s income and taxed as per the applicable slab rate. Under Section 194K, fund houses also deduct TDS if dividend payouts exceed Rs 10,000 in a financial year.

Capital gains arise when you redeem mutual fund units at a price higher than your purchase cost. These gains are taxed only at the time of redemption and are classified as short-term or long-term, based on the holding period. For equity-oriented funds, gains are short-term if units are held for up to 12 months and long-term if held for more than 12 months. Debt funds purchased after April 1, 2023, are always treated as short-term, regardless of the holding period, and taxed at slab rates.

Tax rates differ across categories. Short-term capital gains on equity funds are taxed at 20%, while long-term gains above the annual exemption limit of Rs 1.25 lakh are taxed at 12.5%, without indexation. Hybrid funds are taxed based on their equity exposure, while debt-oriented and low-equity funds largely attract slab-rate taxation. For SIP investors, taxation follows a first-in-first-out (FIFO) method, meaning each instalment is taxed separately based on its own holding period. Additionally, Securities Transaction Tax (STT) of 0.1% applies to equity-oriented mutual funds but not to debt funds.

Tax on stocks - listed and unlisted

Shares are treated as capital assets under the Income Tax Act, and profits from their sale are taxed as capital gains. The tax treatment depends on whether the shares are listed or unlisted and the length of the holding period.

Listed equity shares qualify as long-term capital assets if held for more than 12 months. Long-term capital gains (LTCG) on such shares are taxed at 12.5% without indexation, after an annual exemption of ₹1.25 lakh. Gains from listed shares sold within 12 months are classified as short-term capital gains (STCG) and taxed at 20%.

For unlisted and other shares, the long-term threshold is higher. Shares held for more than 24 months are treated as long-term, with LTCG taxed at 12.5% without indexation. If sold within 24 months, the gains are considered short-term and taxed at the investor’s applicable income tax slab rate.

Capital gains on shares are thus categorised as short-term or long-term based on the holding period, which runs from the date of acquisition to the date of sale. Understanding these distinctions is essential for effective tax planning and optimising post-tax returns from equity investments.