Budget 2026-27: Comprehensive LTCG Tax Reforms on the Horizon
As India prepares for the Union Budget 2026-27, significant reforms to the long-term capital gains (LTCG) tax regime have emerged as a central focus for taxpayers, policymakers, and financial market participants across the nation. With the new Income-tax Act, 2025 scheduled to come into force from April 1, 2026, this transitional period presents a timely and strategic opportunity for the government to thoroughly review, recalibrate, and rationalize capital gains provisions. The objective is to better align these tax structures with India's broader economic, investment, and capital market development goals, fostering a more conducive environment for sustainable growth.
Building on Recent Simplification Measures
The Union Budget 2024 introduced substantial changes to the capital gains taxation framework with the stated aims of simplification and rationalization. In a major policy shift, indexation benefits were withdrawn, and the LTCG tax rate was reduced from 20% to 12.5% across various asset classes. Additionally, the exemption threshold for LTCG on listed securities was increased from INR 1 lakh to INR 1.25 lakh, providing modest but meaningful relief to retail investors. The holding period criteria were also simplified into two clear categories: a one-year holding period for listed securities and a two-year holding period for all other assets. These measures were designed to reduce complexity and minimize interpretational disputes within the taxation system.
While these reforms successfully streamlined certain aspects of the regime, they simultaneously highlighted specific areas where further refinement and enhancement are necessary. As the new Income-tax Act prepares to take effect, Budget 2026 offers substantial scope for targeted, thoughtful reforms that could significantly strengthen the LTCG framework and encourage greater market participation from diverse investor segments.
Key Expectations for LTCG Framework Enhancement
A primary expectation from Budget 2026 is a comprehensive review of the existing LTCG framework. Enhancing the current INR 1.25 lakh exemption threshold for listed securities could meaningfully improve post-tax returns for small and retail investors, thereby encouraging sustained and increased participation in equity markets. At a time when household savings are gradually shifting towards financial assets, such a progressive move would reinforce long-term investment behavior and support broader financial inclusion objectives.
There is also a compelling case for calibrated rationalization of LTCG tax rates to strengthen India's competitiveness as a preferred investment destination. A balanced and strategic approach, particularly for long-term investments, could effectively support capital formation while maintaining revenue certainty for the government. Further simplification could be achieved by standardizing holding periods across different asset classes. Adopting a uniform one-year holding period would improve regulatory certainty, reduce disputes, and significantly ease compliance burdens for taxpayers.
Additionally, while indexation was removed to simplify computation processes, reintroducing limited or optional indexation for select long-term assets—such as immovable property and unlisted securities—could help mitigate the impact of inflation on genuine long-term investments. This would be especially beneficial where the holding period remains two years, protecting investors from inflationary erosion of their real returns.
Facilitating Efficient Corporate Restructuring
Capital gains taxation plays a critical role in facilitating smooth corporate restructuring processes. While mergers between Indian companies currently enjoy tax-neutral status subject to prescribed conditions, extending similar tax treatment to outbound mergers—where an Indian company amalgamates into a foreign entity—could facilitate smoother cross-border reorganizations. This would enhance India's global competitiveness and attract foreign investment.
Similarly, although intra-group demergers benefit from tax neutrality, no corresponding relief exists for slump sales. Introducing tax neutrality for intra-group slump sales, subject to reasonable conditions such as continued holding of the undertaking for a minimum period of three years, would enable legitimate business restructuring without triggering immediate tax costs. This would support corporate efficiency and strategic realignments.
Another area warranting careful reconsideration is the taxation of share buybacks. Since October 2024, buyback proceeds have been taxed as dividend income, while the cost of acquisition is treated as capital loss. This approach disproportionately impacts shareholders, particularly those with low acquisition costs, as the full buyback consideration is taxed without allowing set-off of the capital loss. The current regime also increases compliance burdens for non-resident investors and reduces the attractiveness of buybacks as an exit option for minority shareholders, indicating a clear need for policy recalibration.
Strengthening Personal Tax Compliance Mechanisms
Beyond rates and thresholds, comprehensive compliance reform remains essential for an efficient tax system. The Capital Gains Account Scheme (CGAS), which enables exemptions under sections 54, 54F, and related provisions, remains largely manual and bank-dependent, with limited integration into the income-tax e-filing system. Implementing digital enhancements such as enabling online CGAS account opening linked to PAN, permitting private RBI-regulated banks to offer CGAS accounts, integrating CGAS data with ITR forms for auto-population, and introducing simplified in-return disclosures could significantly reduce compliance friction, minimize errors, and decrease litigation.
Conclusion: A Strategic Opportunity for Growth
In conclusion, the Union Budget 2026-27, coupled with the rollout of the Income-tax Act, 2025, offers a strategic and timely opportunity to fine-tune the LTCG regime for maximum effectiveness. Thoughtful reforms focused on higher exemption thresholds, rationalized tax rates, simplified holding periods, improved compliance mechanisms, and coherent corporate restructuring provisions could substantially boost investor confidence across all segments. Such forward-looking measures would not only deepen market participation but also play a critical role in strengthening India's capital markets and supporting long-term, sustainable economic growth. The government's approach to these reforms will be closely watched by stakeholders nationwide as India continues its journey toward becoming a global economic powerhouse.
