Budget 2026 expectations: Why capital gains tax reform matters for market participation – explained

A key expectation from Budget 2026 is a further review of the LTCG framework. (AI image)

By: Amit BablaniAs India prepares for the Union Budget 2026-27, reforms to the long-term capital gains (LTCG) tax regime are firmly in focus for taxpayers, policymakers, and financial market participants. With the new Income-tax Act, 2025 set to come into force from 1 April 2026, the transition provides a timely opportunity for the government to review, recalibrate, and rationalize capital gains provisions to better align them with India’s broader economic, investment, and capital market objectives.The Union Budget 2024 introduced significant changes to the capital gains taxation framework with the stated objective of simplification and rationalization. In a major shift, indexation benefits were withdrawn, and the LTCG tax rate was reduced from 20% to 12.5% across asset classes. The exemption threshold for LTCG on listed securities was also increased from INR 1 lakh to INR 1.25 lakh, providing modest relief to retail investors. Additionally, holding period criteria were simplified into two categories – a one-year holding period for listed securities and a two-year holding period for all other assets – aimed at reducing complexity and interpretational disputes.While these measures streamlined the regime, they also highlighted areas where further refinement is required. As the new Income-tax Act comes into force, Budget 2026 offers scope for targeted reforms to strengthen the LTCG framework and enhance market participation.Revisiting the capital gains tax regimeA key expectation from Budget 2026 is a further review of the LTCG framework. Enhancing the existing INR 1.25 lakh exemption threshold for listed securities could meaningfully improve post-tax returns for small and retail investors and encourage sustained participation in equity markets. At a time when household savings are gradually shifting towards financial assets, such a move would reinforce long-term investment behavior.There is also a case for calibrated rationalization of LTCG tax rates to strengthen India’s competitiveness as an investment destination. A balanced approach, particularly for long-term investments, could support capital formation while maintaining revenue certainty.Further, simplification could be achieved by standardizing holding periods across asset classes. Adopting a uniform one-year holding period would improve certainty, reduce disputes, and ease compliance. Additionally, while indexation was removed to simplify computation, reintroducing limited or optional indexation for select long-term assets such as immovable property and unlisted securities, could help mitigate the impact of inflation on genuine long-term investments, especially where the holding period remains two years.Enabling tax-neutral and efficient corporate restructuringCapital gains taxation plays a critical role in facilitating corporate restructuring. While mergers between Indian companies are tax neutral subject to prescribed conditions, extending similar tax treatment to outbound mergers, where an Indian company amalgamates into a foreign company could facilitate smoother cross-border reorganizations and enhance India’s global competitiveness.Similarly, although intra-group demergers enjoy tax neutrality, no corresponding relief exists for slump sales. Introducing tax neutrality for intra-group slump sales, subject to conditions such as continued holding of the undertaking for a minimum period of three years, would enable legitimate business restructuring without triggering immediate tax costs.Another area warranting reconsideration is the taxation of share buybacks. From October 2024, buyback proceeds are taxed as dividend income, while the cost of acquisition is treated as capital loss. This disproportionately impacts shareholders, particularly those with low acquisition costs – as the full buyback consideration is taxed without allowing set-off of the capital loss. The regime also increases compliance burdens for non-residents and reduces the attractiveness of buybacks as an exit option for minority shareholders, indicating a need for policy recalibration. Strengthening personal tax compliancesBeyond rates and thresholds, compliance reform remains essential. The Capital Gains Account Scheme (CGAS), which enables exemptions under sections 54, 54F, and related provisions, remains manual and bank-dependent, with limited integration into the income-tax e-filing system. Enabling online CGAS account opening linked to PAN, permitting private RBI-regulated banks to offer CGAS accounts, integrating CGAS data with ITR forms for auto-population, and introducing simplified in-return disclosures could significantly reduce compliance friction, errors, and litigation.In conclusion, the Union Budget 2026-27, coupled with the rollout of the Income-tax Act, 2025, offers a strategic opportunity to fine-tune the LTCG regime. Thoughtful reforms focused on higher exemption thresholds, rationalized tax rates, simplified holding periods, improved compliance mechanisms, and coherent corporate restructuring provisions could substantially boost investor confidence. Such measures would not only deepen market participation but also play a critical role in strengthening India’s capital markets and supporting long-term, sustainable economic growth.(Amit Bablani is Partner, Deloitte India)