- Removing LTCG tax could boost post‑tax returns for long‑term equity holders by up to 3‑4% annually.
- Liquidity and price discovery may improve as investors feel freer to rebalance.
- High‑income earners could stay in India if the effective tax ceiling drops below 30%.
- Sector winners include financials, consumer discretionary, and export‑driven firms that rely on equity financing.
- Bearish outcomes arise if a repeal triggers fiscal deficits, prompting higher corporate taxes.
You’re missing the biggest tax catalyst that could reshape Indian equity returns. As the Union Budget 2026 looms, a chorus of voices on Dalal Street is demanding the repeal of the 10% long‑term capital gains (LTCG) tax on equities. The debate isn’t just about a number on a tax form—it’s about the very architecture of wealth creation for Indian households.
Why LTCG Tax Removal Matters for Indian Equities
The current LTCG framework imposes a flat 10% tax on gains above ₹1 lakh per financial year, without allowing indexation. For a portfolio that compounds at 12% annually, a 10% tax on the upside reduces the effective growth rate to roughly 10.8% after tax. Over a 20‑year horizon, that differential translates into a 40% shortfall in final wealth. By scrapping the tax, investors recapture the full compounding power, aligning the tax regime with the government’s stated goal of financialising household savings.
From a macro perspective, higher after‑tax returns encourage deeper participation from retail and institutional investors alike, feeding more capital into the equity market. A broader investor base improves market depth, reduces volatility, and lowers the cost of capital for Indian firms—critical ingredients for the “Viksit Bharat 2047” ambition of a $30 trillion economy.
Sector‑Wide Ripple Effects of a Potential LTCG Repeal
Equity‑intensive sectors stand to gain the most. Financial services firms, which raise capital through equity issuance, could see lower dilution costs, boosting earnings per share (EPS) growth. Consumer discretionary companies, many of which rely on retail sentiment, may experience a surge in demand as investors allocate more funds to growth stocks.
Conversely, sectors with heavy reliance on debt financing—such as utilities and telecom—might feel a relative disadvantage, as the tax advantage for equity narrows the gap between debt‑heavy and equity‑heavy capital structures. The net effect is a rebalancing of sector weightings toward more equity‑driven growth stories.
What Competitors Like Tata and Adani Are Doing Amid Tax Uncertainty
Market leaders are already adjusting their capital strategies. Tata Group companies have increased their share buy‑back programmes, signaling confidence in long‑term valuations while providing a tax‑efficient return of capital to shareholders. Adani Enterprises, on the other hand, is accelerating its issuance of green bonds to diversify funding sources, hedging against any future fiscal tightening that could follow a failed LTCG repeal.
Both conglomerates are also lobbying through industry bodies, emphasizing that a stable, low‑tax environment is essential for retaining high‑net‑worth Indian investors who are increasingly eyeing offshore hubs like Dubai. Their actions underscore how tax policy can directly influence corporate financing decisions.
Historical Lens: LTCG Tax Changes Since 2018
The LTCG tax was re‑introduced in the 2018 budget after a decade of exemption. Initial market reaction was a brief sell‑off, but the equity rally soon recovered as investors adjusted to the new regime. In 2020, the exemption threshold of ₹1 lakh helped cushion small investors, but the tax remained a drag on large‑cap fund performance.
When the government temporarily reduced the LTCG rate to 5% in 2022, the market surged by roughly 7% over the next six months, illustrating the price sensitivity to tax rates. However, the reversal back to 10% in 2023 led to a modest pullback, reinforcing the argument that tax stability is as important as the rate itself.
Technical Primer: LTCG vs STCG Explained
Long‑Term Capital Gains (LTCG) apply when an equity asset is held for more than 12 months. The tax is a flat 10% on gains exceeding ₹1 lakh, with no indexation benefit. Short‑Term Capital Gains (STCG) are levied when the holding period is 12 months or less, taxed at the investor’s marginal income tax rate (up to 30% plus surcharge).
Because LTCG is lower, it encourages a buy‑and‑hold approach, theoretically fostering market stability. However, the tax can also create “lock‑in” behavior, where investors postpone selling winners to avoid the tax, reducing liquidity and impairing price discovery.
Investor Playbook: Bull and Bear Scenarios
Bull Case: The budget announces a full repeal of LTCG tax. Retail inflows surge, equity valuations rise modestly (5‑7% YoY), and sectoral reallocation favors high‑growth stocks. Companies experience lower equity‑costs, leading to higher EPS growth and dividend payouts. Portfolio managers increase exposure to mid‑cap and small‑cap equities, capitalising on the compounding boost.
Bear Case: The budget retains the 10% LTCG tax but introduces higher surcharges on high‑income earners, prompting capital flight to tax‑friendly jurisdictions. Corporate earnings face higher effective tax burdens, and the government compensates with increased corporate tax rates. Market volatility spikes, and investors rotate into defensive assets like gold and government bonds.
For the prudent investor, the key is flexibility. Maintain a core‑satellite portfolio: a core of diversified large‑cap index funds to capture market upside, and satellite positions in sectors poised to benefit from tax reform. Use systematic rebalancing to avoid lock‑in effects, and keep an eye on fiscal policy cues in the months leading up to the budget announcement.