What is Long Term Capital Gain tax? Why do investors and other stakeholders want it removed in every budget?

Union Budget 2026: As the Union Budget approaches, one familiar demand has resurfaced across Dalal Street and among long-term investors: the removal of Long-Term Capital Gains (LTCG) tax on equities. Introduced with the intent of improving tax fairness, LTCG has, over the years, become one of the most debated aspects of India’s investment taxation framework.

Each Budget season, market participants revisit the same question—does taxing long-term equity gains align with India’s goal of encouraging household participation in capital markets?

To understand the debate, it is important to first understand what LTCG is and why it continues to attract criticism despite its relatively modest rate.

What is Long-Term Capital Gain tax?

Long-Term Capital Gain refers to the profit earned from the sale of an asset held for a specified minimum period. In the case of listed equity shares and equity-oriented mutual funds, a holding period of more than 12 months qualifies the gain as long-term. In India, LTCG on equity investments is currently taxed at 10% on gains exceeding ₹1 lakh in a financial year, without the benefit of indexation.

This tax was reintroduced in the Union Budget of 2018, ending a long period during which long-term equity gains were exempt. The government at the time 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 that it does little to offset the broader impact on long-term wealth creation.

Unlike short-term capital gains, which apply to assets sold within 12 months and are taxed at higher rates, LTCG is meant to target patient capital. However, many investors believe taxing long-term investments sends a contradictory signal, especially when policymakers repeatedly emphasise the importance of financialisation of savings and equity participation.

Why investors want LTCG removed?

Investors and market stakeholders argue that LTCG discourages long-term investing by reducing post-tax returns, particularly for individuals who rely on equity markets for retirement planning and wealth accumulation. Over long holding periods, even a seemingly low tax rate can materially impact compounding, especially when indexation benefits are not allowed.

Another key concern is the issue of double taxation. Companies already pay corporate tax on profits, and dividends are taxed in the hands of shareholders. Taxing capital gains on top of this, investors argue, amounts to taxing the same income multiple times. Market participants say this reduces India’s competitiveness as an investment destination compared with jurisdictions that offer tax-efficient long-term equity frameworks.

Fund managers and market experts also point out that LTCG often leads to behavioural distortions. Investors tend to 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 risk rather than reducing it.

What Experts Want?

Rajeev Gupta, Executive Vice President and Business Head – Third Party Products at Religare Broking Ltd, said India’s tax debate is at a critical juncture as the economy shifts from being saver-led to increasingly investor-driven. He noted that while the Union Budget 2025 was a landmark for the middle class — effectively making income up to ₹12.75 lakh tax-free — the upcoming Union Budget 2026 must now confront what he described as an “aspiration drain”.

Gupta pointed out that India’s highest earners, those with annual income above ₹2 crore, currently face an effective tax rate of nearly 39% to 43% after surcharges. According to him, such taxation levels risk pushing talent and capital out of the country, with entrepreneurs increasingly relocating to low-tax jurisdictions such as Dubai, where personal income tax is nil.

“Our highest earners are facing peak tax rates close to 40% or more, and that is no longer just a tax — it is becoming an exit trigger,” Gupta said, adding that rationalising surcharges and capping the effective tax rate at around 30% would help keep Indian capital anchored domestically.

On capital markets, Gupta flagged concerns around long-term taxation, arguing that the current 12.5% Long-Term Capital Gains tax has introduced unnecessary friction for investors. “Taxing inflationary gains discourages long-term compounding, which is essential if India wants to achieve its Viksit Bharat 2047 vision of a $30 trillion economy,” he said, urging policymakers to consider reverting to the earlier 10% LTCG regime.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.