As expectations build around Budget 2026, long-term capital gains (LTCG) taxation has once again come into focus. While many investors hope for a reduction in the LTCG tax rate, experts suggest that increasing the exemption limit could provide far greater relief, especially to small and retail investors.
At present, long-term capital gains from listed equities and equity-oriented mutual funds are exempt from tax up to ₹1.25 lakh annually. Gains beyond this threshold are taxed at a flat rate of 12.5 per cent. While a cut in the tax rate may appear attractive, data indicates that such a move would primarily benefit high-net-worth individuals, who account for a disproportionately large share of total LTCG collections.
Government figures show that a significant portion of capital gains is concentrated among a small group of wealthy investors, while the majority of retail investors report relatively modest gains. As a result, lowering the tax rate would have limited impact on most taxpayers, whereas increasing the exemption limit would directly shield a larger number of small investors from taxation altogether.
Tax experts argue that enhancing the tax-free threshold would be a more equitable and targeted measure. It would encourage long-term participation in equity markets, reduce the tax burden on middle-class investors, and support household wealth creation without significantly impacting government revenue.
Given these considerations, analysts believe Budget 2026 is more likely to focus on raising the LTCG exemption limit rather than reducing the tax rate. Such a move could strike a better balance between investor relief and fiscal prudence.