As Union Budget 2026 approaches, a familiar demand has resurfaced across Dalal Street and among long-term investors: the removal of Long-Term Capital Gains (LTCG) tax on equities. Market participants continue to question whether taxing long-term equity gains aligns with India's goal of encouraging household participation in capital markets, making this one of the most debated aspects of India's investment taxation framework.

Understanding Long-Term Capital Gains Tax

Long-Term Capital Gain refers to the profit earned from the sale of an asset held for a specified minimum period. For listed equity shares and equity-oriented mutual funds, a holding period exceeding 12 months qualifies the gain as long-term.

The tax was reintroduced in Union Budget 2018, ending a long period during which long-term equity gains were exempt. The government argued that the exemption created an imbalance between asset classes and led to revenue loss. While the ₹1 lakh exemption was intended to protect small investors, critics argue it does little to offset the broader impact on long-term wealth creation.

Key Investor Concerns

Investors and market stakeholders present several arguments against LTCG taxation:

Impact on Returns: LTCG discourages long-term investing by reducing post-tax returns, particularly affecting individuals relying on equity markets for retirement planning and wealth accumulation. Over long holding periods, even the seemingly low tax rate can materially impact compounding, especially without indexation benefits.

Double Taxation Issues: Market participants argue that companies already pay corporate tax on profits, and dividends are taxed in shareholders' hands. Taxing capital gains on top of this amounts to taxing the same income multiple times, reducing India's competitiveness compared to jurisdictions offering tax-efficient long-term equity frameworks.

Behavioral Distortions: LTCG often leads to market inefficiencies as investors delay selling winning positions to avoid triggering tax, reducing liquidity and efficient price discovery. In volatile markets, the tax can discourage portfolio rebalancing, potentially increasing rather than reducing risk.

Expert Perspectives on Tax Reform

Rajeev Gupta, Executive Vice President and Business Head – Third Party Products at Religare Broking Ltd, highlighted India's transition from being saver-led to increasingly investor-driven. He noted that while Union Budget 2025 effectively made income up to ₹12.75 lakh tax-free, the upcoming budget must address what he described as an "aspiration drain."

Gupta emphasized that India's highest earners face effective tax rates of nearly 39.00% to 43.00% after surcharges, risking talent and capital flight to low-tax jurisdictions such as Dubai, where personal income tax is nil. He advocated for rationalizing surcharges and capping the effective tax rate at around 30.00% to keep Indian capital anchored domestically.

Regarding capital markets, Gupta flagged concerns around the current 12.50% Long-Term Capital Gains tax, arguing it introduces unnecessary friction for investors. He stated that taxing inflationary gains discourages long-term compounding, which is essential for India's Viksit Bharat 2047 vision of achieving a $30 trillion economy, urging policymakers to consider reverting to the earlier 10.00% LTCG regime.

Market Implications

The debate reflects broader concerns about India's investment climate and competitiveness. Market experts argue that removing or reducing LTCG would encourage longer holding periods, improve market stability, and attract more household savings into equity markets. However, the government must balance these demands against revenue considerations and tax policy coherence across asset classes.