Pre-Budget 2026: Expectations on Capital Gains Tax for Equity & Mutual Funds
As the Indian markets navigate record highs with the Nifty 50 touching the 26,300 milestone in late 2025 investors are laser-focused on the upcoming Union Budget 2026-27. At Motilal Oswal we believe that while market returns are driven by corporate earnings, the net wealth in your pocket is determined by the tax efficiency of your portfolio.
In the previous fiscal cycle, we saw a major rationalization of Capital Gains. For 2026, the theme is expected to be Stability and Simplification. Here is our outlook on the capital gains landscape through the QGLP lens.
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The Current Landscape (FY 2025-26)
To understand the expectations, we must first look at the New Normal established in the previous budget. As of today, the taxation for equity-oriented assets stands as follows:
Top Expectations for Budget 2026
A. Increase in LTCG Exemption Limit
The current exemption limit of ₹1.25 lakh was a welcome move in 2024 (up from ₹1 lakh). However, given the massive surge in retail participation now exceeding 140 million demat accounts there is a strong expectation to raise this limit to ₹2 lakh.
- Motilal’s View: A higher exemption limit encourages small-ticket retail investors to stay committed to the equity markets, furthering the Financialization of Savings in India.
B. Indexation: The Return of a Shield?
The removal of indexation benefits across most asset classes was one of the boldest moves in recent history. For 2026, investors (particularly in the Real Estate and Unlisted Shares space) are hoping for a selective reintroduction of indexation or a further reduction in the flat rate to 10% to account for high real inflation in those sectors.
C. Parity for Debt Mutual Funds
Currently, debt mutual funds are taxed at the individual's slab rate (STCG) regardless of the holding period if acquired after April 1, 2023.
- The Expectation: Many industry experts are calling for a Long-term classification for debt funds (holding > 36 months) with a flat tax rate of 12.5%, similar to other assets. This would bring much-needed parity and revive the debt fund category which has seen muted growth compared to equity.
Holding Periods: The Push for Uniformity
One of the biggest pain points for investors is the varying Long-Term definitions:
- Listed Equity: 12 Months
- Real Estate / Unlisted Shares: 24 Months
- Debt / Gold: Currently No LTCG benefit (Slab rate)
Expectation: Taxpayers are looking for a Unified Holding Period of 12 months for all financial assets and 24 months for all non-financial assets. This simplification aligns with the government's goal of Ease of Doing Business and making tax compliance easier for the average citizen.
Grandfathering Clause: Protecting Old Wealth
At Motilal Oswal we emphasize longevity. For investors holding stocks since before 2018, the Grandfathering rule (Fair Market Value as of Jan 31, 2018) is crucial. There is an expectation that the government will clarify and perhaps extend such protections to newer asset classes that have recently seen tax hikes, ensuring that long-term wealth creators aren't penalized for past gains.
Motilal’s Strategy: How to Position Your Portfolio
While we wait for the Finance Minister’s briefcase to open, our advice remains rooted in fundamentals:
- Tax-Loss Harvesting: Before March 2026, consider harvesting your ₹1.25 lakh LTCG exemption. Sell and immediately repurchase your quality holdings to reset your cost of acquisition tax-free.
- Focus on the 'Q' in QGLP: Tax rates are secondary to business quality. A company growing earnings at 20%+ CAGR (like our top picks in Telecom or Financials) will outperform even after accounting for a 12.5% tax.
- Equity is Still the Most Efficient: Even at 12.5%, equity remains the most tax-efficient way to beat inflation in India, especially compared to Fixed Deposits which are taxed at slab rates (up to 30%+).
Comparison: Post-Tax Returns (Estimated)
Final Thoughts
The 2026 Budget is likely to focus on consistency. The government has already done the heavy lifting of restructuring the rates; now, the market expects them to Sit Tight (just like our philosophy). If the government provides even minor relief in the form of a ₹2 lakh exemption limit, we could see a massive New Year rally in domestic liquidity.
Explore Budget 2026 Insights - Income Tax Slab Changes | Taxpayer Expectations | Salaried Class Expectations | Standard Deduction & Rebates | LTCG Rule Changes | Mutual Fund Taxation | 80C & 80D Expectations