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Traders and investors hope budget 2026 will lower capital gain taxes and STT amid the record FII outflow.
Capital Gains Tax Rules: What LTCG and STCG Mean For Investors Ahead Of Budget 2026
Budget 2026: With just a day to go before the Union Budget 2026 is presented on Sunday, February 1, traders and investors are hoping for relief from higher capital gains taxes and the securities transaction tax (STT). The previous Budget had raised capital gains taxes, adding to the cost of trading and investing in capital markets and squeezing overall returns.
With a record outflow of Foreign Institutional investors (FIIs) and muted performance of the stock market, expectations are high among investors that the budget 2026 might bring some relief by tweaking the long-term and short-term capital gains taxes or increasing thresholds.
What Are Long-Term Capital Gains And Short-Term Capital Gains?
Short-term capital gains (STCG) are gains made by selling assets that are held for short durations, ranging from a few months up to one year. Commonly, short-term gains are made on stocks, bonds and real estate investments, where gains are realised quickly. These are taxed at the ordinary income tax rates.
Long-term capital gains (LTCG) are profits made from the sale of asset investments held for over a year by the individual or in collaboration. In a major difference from STCGs, LTCGs face lower tax rates as authorities encourage long-term capital holders to persist with their investments and successful financial strategies.
Last year, the government increased capital gain taxes with long-term capital gains (LTCG) tax moving from 10 percent to 12.5 percent and short-term capital gains (STCG) rising from 15 percent to 20 percent.
Major Expectations From Budget 2026
Priyanka Duggal, Partner, Deal Structuring, Grant Thornton Bharat believed there is a compelling case for capital gains tax reform that can both simplify the existing framework and meaningfully enhance deal activity and foreign investor confidence.
However, she cautioned, given the government’s emphasis on revenue certainty, any reforms are likely to be measured and focused on improving clarity, reducing litigation and enhancing ease of compliance rather than offering sweeping tax concessions. “Investors, in any case, tend to value a stable, predictable and transparent tax regime over frequent or radical rate changes,” she added.
Key expectations:
– From an individual investor’s standpoint, key budget expectations include a further enhancement of the LTCG exemption threshold beyond INR 1.25 lakh and the reintroduction of some form of indexation benefit for select long-term assets, particularly immovable property, to address genuine inflationary adjustments.
– In the context of corporate restructurings, several areas warrant rationalisation and recalibration. These include the absence of a defined tax framework for outbound cross-border mergers, non-tax neutral mergers/demergers, non-tax neutral conversion of LLP into company and vice-versa. Furthermore, longer 36 month holding requirement for slump-sale compared to the 24 month threshold applicable to most other assets, and a re-examination of the buy-back taxation regime, especially where companies are facilitating genuine investor exits without an intent to distribute profits by way of dividends.
– For the FPI and PE / funds community, targeted reforms are essential to sustain long-term global capital flows, support valuation confidence and accelerate economic growth. Priority areas include providing clarity on foreign-currency cost computation for transfers executed in Indian currency, removing the deemed short-term classification for debt securities, and establishing clear and unambiguous rules for treaty relief in cases of indirect transfers.
January 31, 2026, 12:40 IST
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