Budget 2026: Investors Eye Capital Gains Tax Relief

Investors expect that in order to bring about Budget 2026, the rate of long-term capital gains tax (LTCG) will be reduced from 12.5% to 10%, as well as have increased exemption limits and the reintroduction of indexation as per the reports by Money Control. 
The types of investments that are included under these provisions are equity, real estate, mutual funds, gold and bonds, with varying timelines for holding each of the assets. Uniformity in the holding period for assets is also on the request list of investors as it will create efficiencies when adhering to the tax code.
As these reforms are implemented, they should result in an increase in net returns for investors and lead to an increase in participation in the markets.

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Push for Lower Rates and Exemptions

As of July 2024, the long-term capital gains tax (LTCG) will have a standard exemption level of ₹1.25 lakh for equity mutual funds held for one year and real estate for two years with a standard LTCG rate of 12.5% on gains above ₹1.25 lakh. By increasing the standard exemption to ₹2.0 - ₹2.5 lakh, it will assist in helping small retail investors. To increase the uniformity of holding timelines for different asset classes for easier tax planning, the new rules will allow for shorter holding periods.
With the introduction of the debt mutual fund over 36 months, these investments will now fall under a tiered rate, up to 30%. Previous investments in a debt mutual fund over 36 months could have been subject to only a 20% tax rate.

Indexation Restoration Demands

Budget 2024 has ended indexation (to adjust the acquisition cost of an asset for inflation) for the majority of assets acquired. This change has resulted in an increase in effective taxes on real estate, gold, listed shares, equity funds and bonds, as well as all non-primary residential property. A reversal of these in budget 2026 will increase for senior citizens, for primary homes, or for debt funds would help reduce the burden of long-term saving.
Previously, indexing decreased the amount of taxable gain by allowing for the price increase due to inflation.

Broader Tax Regime Context

Reforms are in response to investor demand for preserving retirement savings and for increasing the liquidity of bonds. The government has to balance supporting growth with providing relief in a high rate environment (e.g., Japan's 20.31% and the United Kingdom's 24% or more). In addition, the government has to be mindful of the need for growth and revenue ahead of presenting their plans in February.