As Finance Minister Nirmala Sitharaman prepares to present Union Budget 2026 on February 1, expectations are building around targeted policy measures aimed at sustaining economic momentum and reinforcing India's global competitiveness. The budget comes at a time when India's economy is projected to expand by 7.00-7.50% in 2026-27, supported by steady consumption and continued public investment, while policymakers navigate challenges including tax litigation, climate risks in agriculture, and procedural hurdles in customs and GST.

Economic Outlook and Fiscal Framework

The Centre is expected to balance medium-term fiscal consolidation with strong emphasis on capital expenditure. The fiscal deficit is estimated at around 4.30% of GDP, while infrastructure spending is likely to see double-digit increases to support economic growth.

Tax Simplification and Dispute Resolution

Industry stakeholders are seeking comprehensive tax reforms to reduce regulatory friction and improve business environment. Key expectations include faster disposal of pending tax cases, tax neutrality for fast-track demergers, and rationalisation of holding periods for slump sales. The budget is also expected to provide clarity on Minimum Alternate Tax (MAT) for foreign companies and reduce transfer pricing disputes through clearer definitions and guidelines.

Customs and Trade Facilitation

Trade facilitation measures are expected to feature prominently in the budget, with focus on streamlining customs procedures and reducing compliance burden. Key demands from industry include rationalisation of customs duty slabs, implementation of fully operational single-window clearance system, and quicker Authorised Economic Operator certifications. The budget may also address measures to unlock large sums currently stuck in customs litigation.

Agriculture Reforms and Food Security

Budget 2026 is expected to strengthen India's agricultural self-sufficiency, particularly in oilseeds and pulses production. The government is likely to promote crop diversification initiatives, including support for millets cultivation. Significant investments are anticipated in storage infrastructure, cold chain facilities, and climate-resilient farming practices to reduce post-harvest wastage and improve farm incomes.

Sectoral Reforms and GST Relief

The budget is expected to include targeted sectoral reforms, particularly amendments to improve the financial health of power distribution companies. GST reforms are anticipated to focus on speeding up refunds, easing inverted duty structures, and reducing disputes. These measures aim to improve cash flows for exporters and Micro, Small, and Medium Enterprises (MSMEs), supporting their operational efficiency and growth prospects.

With India facing a challenging international environment, Budget 2026-27 represents a critical opportunity to implement policy measures that can sustain economic momentum while addressing structural challenges across key sectors of the economy.

India's capital gains taxation framework for equity investments has undergone multiple transformations over the past three decades, reflecting changing policy priorities and market conditions. As Budget 2026 approaches, market participants are increasingly vocal about potential tax relief, particularly given persistent foreign investor selling and weak equity returns. Foreign institutional investors have sold over ₹1.6 lakh crore worth of Indian equities in 2025, with selling continuing into early 2026.

Understanding Capital Gains Classification

Capital gains represent the profit investors earn when selling assets like shares, mutual funds, or property at prices higher than their purchase cost. In equity markets, these gains are classified based on holding periods. Short-term capital gains (STCG) apply when listed shares are sold within one year of purchase, while long-term capital gains (LTCG) apply to shares held for more than one year.

The 1990s Framework

India's early approach to equity taxation in the 1990s featured a 20% tax rate on long-term capital gains, with indexation benefits available to investors. Indexation adjusts the asset's purchase price for inflation before calculating capital gains, effectively reducing taxable income by reflecting inflation's impact over time. During this period, short-term capital gains taxation did not exist as a concept.

The 2004 Paradigm Shift

A fundamental change occurred in 2004 when the government introduced the Securities Transaction Tax (STT) on equity trades while simultaneously abolishing long-term capital gains tax on listed equities held for more than one year. Short-term gains were taxed at a concessional rate, later standardized at 15%. This regime, lasting from 2004 to 2018, aimed to tax transactions rather than profits, simplifying compliance and encouraging broader market participation.

The tax-free LTCG period significantly deepened India's equity markets, leading to increased retail participation, growing mutual fund inflows, and enhanced foreign investor interest due to the absence of long-term capital gains taxation.

2018 Reintroduction and Subsequent Changes

The government reintroduced long-term capital gains tax in 2018, citing the need for greater tax equity and revenue mobilization. From April 1, 2018, long-term gains exceeding ₹1 lakh annually were taxed at 10% without indexation benefits. The government explicitly removed indexation benefits, opting for a flat tax rate on nominal gains.

Budget 2024 Adjustments

The Union Budget 2024 brought the most recent major changes, raising short-term capital gains tax from 15% to 20% and long-term capital gains tax from 10% to 12.5%. To mitigate impact on smaller investors, the exemption threshold for LTCG increased from ₹1 lakh to ₹1.25 lakh per financial year. However, indexation benefits remained unavailable.

Current Market Expectations

As Budget 2026 approaches, market participants are advocating for tax rationalization amid challenging market conditions. Key demands include:

• Reduction in LTCG or STCG rates
• Higher exemption thresholds for long-term gains
• Clarity on capital market reforms to improve post-tax returns

The current taxation structure requires investors to pay 20% on short-term capital gains and 12.5% on long-term capital gains exceeding ₹1.25 lakh annually, provided Securities Transaction Tax has been paid. While some investors hope for relief measures, others caution about potential fiscal implications of any tax rollbacks.