Budget 2026: Why A Higher LTCG Exemption May Help More Than A Lower Tax Rate

With Budget 2026 around the corner, expectations are building around a possible change in how long-term capital gains (LTCG) on listed equity and mutual funds are taxed. While some investors are hoping for a reduction in the tax rate, investment manager Kirttan Shah believes the government is more likely to raise the tax-free exemption limit instead.

Quoting official tax data in a LinkedIn post, Shah pointed out the extreme concentration of LTCG among high-income taxpayers. "The total Long Term Capital Gains in AY 23-24 was Rs8,58,022 crore," he wrote.

"The interesting part is that 80 percent of this, or Rs6,90,370 crore, was earned by people having an income of more than Rs5 crore that year. In fact, 90 percent of this capital gain was earned by people having income more than Rs50 lakh."

That concentration is backed by public data. According to the Income Tax Department's ITR statistics, just 191 taxpayers with LTCG above Rs5 crore accounted for Rs3.74 lakh crore in gains, roughly 44 percent of all reported gains. On the other end, taxpayers with total gains below Rs1.5 lakh together earned only about Rs10,564 crore, with an average of Rs36,000 per return.

Currently, LTCG on equity and equity-oriented mutual funds is taxed at 12.5 percent for gains exceeding Rs1.25 lakh in a financial year. Gains below that threshold remain fully exempt. This Rs1.25 lakh exemption has become a key buffer for retail investors, many of whom realise modest profits annually.

Shah argues that raising the exemption would deliver more meaningful relief to small investors than cutting the rate. "If the government reduces the LTCG tax, the lesser rich benefit very little but the rich benefit much more," he wrote.

"The exemption of up to Rs1.25 lakh makes more sense because that directly benefits the less rich."

He added that while a rate cut would help markets and sentiment, it is unlikely given the government's recent policy patterns. "If you reduce LTCG back to 10 percent or lower because you are already charging STT, that would make sense and be great for the markets. But I think the way this government thinks, expect the Rs1.25 lakh limit to increase if at all rather than expecting 12.5 percent to become 10 percent."

Tax experts say the reasoning follows the logic of progressive taxation. A rate cut on LTCG benefits those making very large gains in absolute rupee terms. A higher exemption limit shields a larger portion or all of a small investor's returns from tax.

For investors watching Budget 2026, the key question may not be how low the rate goes, but how high the exemption cap could rise.