Capital Gains Tax Changes in Spotlight Ahead of Budget 2026

Investors and stock market traders are keeping a close eye on developments on capital gains taxation in India as the nation prepares for the Union Budget on February 1, 2026. Changes to these taxes have a direct effect on post-tax returns from mutual funds and stocks, and often create an impact on market sentiment and investor participation. In light of recent tax rate increases and the current market volatility, investors are faced with the crucial Question, "Will Budget 2026 bring relief to the existing capital gains tax structure?"

The Evolution of Capital Gain Taxation in India

Listed stocks were completely exempt from long-term capital gains tax in India from 2004-2018 as long as securities transaction tax was paid.

This approach was designed to simplify tax compliance, promote equity participation among Indian investors, and collect revenue at the transaction level. During a protracted bull market in Indian stocks, this structure helped to increase retail participation and draw in foreign investors. With the Union Budget 2018, the government ended the system by reintroducing a 10% long-term capital gains tax on gains over ₹1 lakh in a fiscal year without indexation benefits. Short-term capital gains on stocks were still subject to a 15% tax. This was a major change in policy because, after more than ten years, equity investments were once again subject to direct profit-based taxation.

The Union Budget 2024–2025 included yet another significant modification. The long-term capital gains tax was raised from 10% to 12.5%, the exemption limit was slightly raised from ₹1 lakh to ₹1.25 lakh per fiscal year, and the short-term capital gains tax on listed stocks was raised from 15% to 20%. Investors were taxed on nominal gains rather than inflation-adjusted returns because indexation benefits were not reinstated.

Why is this change important to investors?

Investment behaviour is directly impacted by capital gains taxes. While higher long-term taxes have an impact on net returns for investors holding stocks over a number of years, higher short-term tax rates may discourage trading and reduce liquidity in the market. Minor adjustments to exemption limits can have a significant effect on liquidity and after-tax results for retail investors. When allocating capital to emerging markets such as India, foreign portfolio investors continue to prioritise taxation parity and clarity.

What are Investors Looking out for in Budget 2026?

Market participants have raised a number of expectations ahead of the next budget. These include simplifying capital gains regulations across asset classes like gold, debt, and real estate and raising the long-term capital gains exemption limit to reduce the tax burden on long-term investors while preventing additional increases in transaction-related taxes like securities transaction tax (STT).

Analysts point out that any decrease in capital gains taxes has financial implications and needs to be weighed against the need for government revenue. Investors must decide whether the government will prioritise fiscal consolidation and uphold the current framework or use tax policy to encourage participation in the equity market, as the budget is only a few days away.

Sources:-

Economic Times
Business Today
NDTV Profit