News Stocks Budget 2026: LTCG Tax Rationalisation Could Influence Indian Stock Market SentimentBudget 2026: LTCG Tax Rationalisation Could Influence Indian Stock Market Sentiment
Investors await Budget 2026 with hopes for LTCG tax rationalisation, including potential reduction from 12.5% to 10% and higher exemption limits beyond ₹ 1.25 lakh. Experts believe such changes could boost market sentiment weakened by FII selling and improve post-tax returns, making Indian equities more attractive and encouraging greater market participation.
*this image is generated using AI for illustrative purposes only.
With Budget 2026 presentation approaching, investor expectations are building around potential changes to long-term capital gains (LTCG) tax policy. Market participants are hopeful that the government will reduce the current tax rate and increase the exemption limit from ₹ 1.25 lakh, measures that experts believe could significantly influence market sentiment during a challenging period marked by foreign institutional investor (FII) selling and geopolitical uncertainties.
Current LTCG Tax Framework
LTCG tax applies to assets held for a specified minimum period, with stock gains after 12 months considered long-term. The Union Budget 2024 brought significant changes to this framework:
| Parameter: | Current Rate | Previous Rate |
|---|---|---|
| LTCG Tax Rate: | 12.5% | 10% |
| Exemption Limit: | ₹ 1.25 lakh | ₹ 1 lakh |
When investors sell stocks or equity mutual fund units after holding them for over a year, LTCG tax is levied on the gains exceeding the exemption threshold.
Expert Views on Market Impact
Shashank Udupa, a SEBI-registered research analyst and Fund Manager at Smallcase, emphasises the potential positive impact of tax rationalisation. "Since the last few months, market participation has been reducing due to a bad market cycle. While the government has taken many steps to revive the economy, reducing the LTCG to earlier 10% and removal of STT will really help create a positive sentiment in the market," he stated.
Udupa highlighted concerns about the current tax structure's impact on government revenue targets. "The triple tax system on capital markets is hurting market sentiment. While the government had ambitious projections to raise revenue from capital markets, due to a lack of participation, its revenue from those markets is well below target. FIIs have been net sellers in this market; a reversal of FII flow can fix both the markets and the falling rupee."
Potential Investment Behaviour Changes
Sujan Hajra, Chief Economist and Executive Director at Anand Rathi Group, believes lower taxes could materially influence investment patterns. "Lower taxes would improve post-tax returns, which could make Indian equities more attractive. As a result, such a move could materially influence investor behaviour and capital flows," he explained.
Ajit Mishra, SVP of Research at Religare Broking, anticipates positive market reactions to potential tax relief measures:
- Securities transaction tax (STT) cuts could act as positive triggers
- LTCG rationalisation might encourage greater market participation
- Such measures could serve as sentiment boosters for the overall market
Market Participation Concerns
Mishra noted the contrast with previous tax regimes: "Earlier, there were more favourable LTCG provisions under the previous tax regime, which are not available now. If the government introduces LTCG rationalisation, it could encourage greater market participation."
The combination of reduced market participation, FII selling pressure, and the current tax structure has created challenging conditions for Indian equity markets. Market experts suggest that Finance Minister Nirmala Sitharaman's potential announcement of LTCG tax cuts and increased exemption limits could provide much-needed relief to market sentiment and investor confidence.
15
