As the Union Budget 2026 draws closer, a persistent demand has once again emerged from Dalal Street and long-term investors across India: the complete removal of Long-Term Capital Gains (LTCG) tax on equity investments. This tax, originally introduced to enhance tax fairness within India's financial ecosystem, has evolved into one of the most contentious elements of the country's investment taxation framework over recent years.
The Annual Budget Question: Does LTCG Tax Align With India's Market Goals?
Every Budget season, market participants and policymakers revisit the same fundamental question: does taxing long-term equity gains truly support India's objective of encouraging greater household participation in capital markets? To fully grasp this ongoing debate, it is essential to first understand what LTCG tax entails and why it continues to face significant criticism despite its relatively moderate rate structure.
Understanding Long-Term Capital Gains Tax in India
Long-Term Capital Gain refers to the profit generated from selling an asset held for a specified minimum duration. For listed equity shares and equity-oriented mutual funds in India, a holding period exceeding 12 months qualifies the gain as long-term. Currently, LTCG on equity investments is taxed at 10% on gains surpassing ₹1 lakh within a financial year, without providing the benefit of indexation to account for inflation.
This tax was reintroduced during the Union Budget of 2018, concluding an extended period where long-term equity gains enjoyed complete exemption. The government's rationale at that time centered on addressing perceived imbalances between different asset classes and mitigating revenue losses. While the ₹1 lakh exemption threshold was designed to safeguard small investors, critics contend it offers minimal relief against the broader negative impact on long-term wealth accumulation strategies.
Unlike short-term capital gains, which apply to assets sold within 12 months and face higher tax rates, LTCG specifically targets patient capital. Nevertheless, numerous investors argue that taxing long-term investments sends conflicting signals, particularly when policymakers consistently emphasize the importance of financializing savings and expanding equity market participation among Indian households.
Why Investors Are Advocating for LTCG Tax Removal
Investors and market stakeholders present multiple arguments for eliminating LTCG tax. They assert that it discourages long-term investing by diminishing post-tax returns, especially for individuals depending on equity markets for retirement planning and sustained wealth accumulation. Over extended holding periods, even a seemingly low tax rate can substantially affect compounding benefits, particularly when indexation advantages remain unavailable.
Another significant concern revolves around double taxation issues. Companies already pay corporate tax on their profits, while dividends face taxation in shareholders' hands. Imposing capital gains tax on top of these existing levies, investors argue, effectively taxes the same income stream multiple times. Market participants warn this reduces India's competitiveness as an investment destination compared to jurisdictions offering more tax-efficient long-term equity frameworks.
Fund managers and financial experts further highlight that LTCG often induces behavioral distortions among investors. Many tend to delay selling profitable positions to avoid triggering tax liabilities, thereby reducing market liquidity and efficient price discovery mechanisms. During volatile market conditions, this tax can discourage essential portfolio rebalancing activities, potentially amplifying investment risks rather than mitigating them.
Expert Perspectives on Taxation Reforms
Rajeev Gupta, Executive Vice President and Business Head – Third Party Products at Religare Broking Ltd, observes that India's tax debate has reached a critical juncture as the economy transitions from being primarily saver-led to increasingly investor-driven. He acknowledges that while the Union Budget 2025 marked a landmark achievement for the middle class—effectively rendering income up to ₹12.75 lakh tax-free—the upcoming Union Budget 2026 must now address what he terms an "aspiration drain" among high earners.
Gupta notes that India's highest earners, those with annual income exceeding ₹2 crore, currently confront effective tax rates nearing 39% to 43% after accounting for surcharges. According to his analysis, such elevated taxation levels risk driving talent and capital overseas, with entrepreneurs increasingly relocating to low-tax jurisdictions like Dubai where personal income tax is nonexistent.
"Our highest earners are facing peak tax rates close to 40% or more, and that is no longer just a tax—it is becoming an exit trigger," Gupta emphasized. He suggests that rationalizing surcharges and capping the effective tax rate at approximately 30% would help retain Indian capital within domestic markets.
Regarding capital markets specifically, Gupta expressed concerns about long-term taxation structures, arguing that the current 12.5% Long-Term Capital Gains tax introduces unnecessary friction for investors. "Taxing inflationary gains discourages long-term compounding, which is essential if India aspires to achieve its Viksit Bharat 2047 vision of a $30 trillion economy," he stated, urging policymakers to consider reverting to the previous 10% LTCG regime.
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