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.

A detailed economic analysis emphasizes the strategic importance of maintaining public capital expenditure focus in India's upcoming Budget 2026-27, highlighting infrastructure investment's proven multiplier effects and structural economic benefits.

Infrastructure Investment Delivers Strong Multiplier Effects

The analysis reveals that infrastructure spending generates significantly higher economic returns compared to consumption expenditure. While consumption spending typically delivers one-time benefits, infrastructure investment creates sustained economic impact through job creation, cost reduction, and productivity enhancement.

This multiplier effect stems from infrastructure's dual impact: immediate demand creation across multiple sectors during construction, followed by ongoing productivity improvements from completed assets.

Capital Expenditure Growth Shows Substantial Expansion

Central government capital expenditure has demonstrated remarkable growth trajectory, reflecting the administration's commitment to infrastructure-led development.

The substantial increase in capital allocation demonstrates the government's strategic positioning of infrastructure investment as the primary instrument for achieving ambitious economic targets.

Logistics Efficiency Improvements Exceed Expectations

Recent research has revealed significant improvements in India's logistics performance, contradicting earlier pessimistic assessments. A comprehensive study commissioned by the Department for Promotion of Industry and Internal Trade and conducted by the National Council of Applied Economic Research has provided updated logistics cost data.

These improvements reflect tangible benefits from sustained investment in highways, rail freight corridors, port modernization, and multimodal logistics infrastructure. The enhanced efficiency directly supports manufacturing and export competitiveness through reduced operational costs.

Private Investment Catalyzed by Public Infrastructure

Public infrastructure investment has demonstrated its effectiveness in stimulating private capital formation rather than crowding it out. Improved connectivity and reduced project risks have enhanced returns across multiple sectors:

• Manufacturing facilities benefit from better transport connectivity
• Logistics operations gain from improved rail and highway networks
• Renewable energy projects leverage enhanced power transmission infrastructure
• Data centers capitalize on improved digital backbone
• Urban services expand with better infrastructure foundation

This catalytic effect positions public capital expenditure as a strategic tool for anchoring long-term investment cycles and shaping positive market expectations.

Strategic Recommendations for Budget 2026-27

The analysis identifies three critical areas for optimizing infrastructure investment effectiveness in the upcoming budget:

High-Multiplier Focus Areas:

• Logistics infrastructure development
• Urban infrastructure expansion
• Power transmission networks
• Renewable energy integration
• Digital infrastructure backbone

Private Capital Integration:

• Enhanced public-private partnerships
• Strategic asset monetization programs
• Blended finance mechanisms

Execution Quality Improvements:

• Streamlined approval processes
• Milestone-linked funding mechanisms
• Enhanced monitoring systems
• Faster ground-level asset delivery

The expert analysis concludes that capital expenditure represents more than budgetary allocation—it constitutes a comprehensive economic strategy. As global growth faces uncertainty and domestic pressures mount, maintaining infrastructure investment focus provides stable economic anchoring while supporting long-term growth objectives. The approach signals policy continuity to markets and investors planning substantial capital commitments, reinforcing India's commitment to sustainable, inclusive economic development.