Budget 2026 LTCG Tax Rationalisation: Market Sentiment - Bulls or Bears Win?

Investors all over the country are now focused on the upcoming Union Budget 2026 and announcements regarding the moderation of LTCG tax. Speculation surrounds Minister Nirmala Sitharaman’s presentation of the budget on 1 February 2026, and the possible adjustments to the taxation of long-term capital gains. 

Will the government roll out investor-friendly changes or keep long-term capital gains the same? Based on the changes, or lack of changes, the stock market could experience turbulence, resulting in a bull run or a bear market. This blog examines the prospects, implications, and expectations of the current scenario and potential market sentiment winners or losers.

Why is LTCG Tax Important?

Long-Term Capital Gains (LTCG) taxes target the profit made from the sale of an asset that has been held for a defined period of time, in this case, over 12 months for shares and equity-oriented mutual funds. In India, capital gains above the tax exemption limit are charged at a lower rate than that of the short-term gains.

Across-the-board changes for Budget 2024 have increased the Long-Term Capital Gains Tax(LTCG tax) for equity shares and equity mutual funds from 10 to 12.5%. The exemption limit remains the same at 1.25 lac rupees. 

The same tax also applies to other assets like property and debt funds, but the rules are different. Other assets may involve more complicated rules like indexation. This tax impacts investor sentiments and returns, especially when the market is doing well, and long-term investments generate significant taxable returns.

The changes to LTCG tax, particularly from 2024 onward, have drawn concentrated commentary and scrutiny. Investors, especially those looking to tax-optimize their investments, are most affected. 

The exemption changes and new indexation rules negatively impact long-term capital gains and may also negatively affect the FII inflows into the equity markets. A significant and positive change in Budget 2026 is indicative of the government encouraging growth in capital markets.

 

 

Changes to LTCG Tax Laws Over the Past 5 Years

Historically, the LTCG tax regime, especially in the last 5 years, is indicative of a government attempting to regulate and provide structure to the capital markets. Budget 2018 was a historical moment when the government started levying LTCG taxes on equities after a long period of exemption. Budget 2024 introduced additional changes to the LTCG tax, especially for equity investments. The revisions increased the existing 10% tax slab to a new rate of 12.5%, the exemption limit also increased people’s tax liability to 1.25 lac rupees, and indexation benefits for select assets were discontinued. The changes reduced the investor’s enthusiasm by attempting to increase the government’s revenue.

On 30 June 2023, market participants put forward expectations related to reversal or fine-tuning. AMFI and industry bodies have made submissions advocating for breaking the ceiling or longer holding periods to be incentivised or exempted. 

Inflation negatively impacting real returns, coupled with the surge in retail participation, justified the taxation of long-term capital gains in the 2026 budget as an effort to reward patient investors and bring some stability to the markets.

Main Anticipated Changes to Long-term Capital Gains Tax for The 2026 Budget

With the 2026 budget steadily approaching, the following have been established as the main expectations for investors: 

 - Increased Exemption Limit: Numerous individuals have predicted an increase in the 1.25 lac ultimatum to an affordable 2 lac or more, thus benefiting small and retail investors. 

- Decreased Tax Rate: A common request designed to promote long-term investing has been the reduction of the tax rate to 10% or the introduction of graded rates based on the period of investment (lower for 5+ years). 

- STT and Other Changes: Many have put forward the proposition of rationalising the Securities Transaction Tax (STT) along with LTCG tax in order to reduce illiquidity and increase investment from Foreign Institutional Investors (FIIs). 

- Specific Incentives: Some have suggested conducting set-off provisions related to certain losses and exempting some investments from the regulatory framework.

Major tax reductions are unlikely based on the government’s preference for fiscal discipline. Changes are more likely to be fine-tuning rather than broad repeal to emphasise stability and the formation of long-term capital.

The Impact of LTCG Tax Rationalisations on the Stock Market

Everyone agrees that any changes in tax laws heavily impact market sentiment. Positive changes in the LTCG tax could be the spark that starts the following fires:

• Increase in the Level of Investor Confidence- The easier it is to realise gains the more willing investors are to take and defend positions. People are more likely to endure lower capital gains tax rates or greater tax exclusion tiers (pushing it up to an indefinite level) because it lowers the tax burden on success. This will likely result in longer ownership of stocks and greater overall participation in the market.
• Foreign Institutional Investor (FII) Inflow- FII inflows should significantly increase as foreign funds and FIIs will compete to invest in our markets. This will also provide support to the single stocks that make up the market caps of the indices: Sensex and Nifty.
• Reduction of Turnover- This will likely result in an overall increase in the level of sustained growth in the market.

Coupled with taxes at an LTCG level that should be minimum mandatory effective in an FII book, many investors will find greater levels of profit to be realised that, in the absence of a regular taxation scheme, will control the level of profit taken in the steady or solid markets. This will result in low to negative stock price actions as a result of small or submarket price level inflows of less liquid stock market-priced products.

As we have seen in our pre-Budget 2026 predictions, the most we can expect from the budget is a set of defensive weapons. If we do not expect inflation, we can expect a significant increase in interest rates, and we will be implementing these defensive weapons in the near future.

Legislate Budget 2026 will most likely spike prices, whereas if it is not a budget that is released is most likely to result in submarket performances from the market.

 

 

Market Sentiment Ahead of Budget 2026: The Anticipation of LTCG Tax Rationalisation

A few economic sentiment indicators have been solid against a backdrop of southern winds, showing confidence in the tax cuts and the hope that LTCG taxes will soon be a thing of the past. That being said, it is incredibly surprising that market participants have any hope that changes will be relatively minor and that people should expect a relaxation of the LTCG tax, which is a total oxymoron.

Global uncertainties, inflation, and fiscal realities are tampering with enthusiasm for the budget 2026. Some experts predict no major changes, and sentiment could be bearish if expectations are not met. The immediate stock market reaction post-budget will be telling- gaps up if the news is positive, sharp pullbacks if otherwise.

Bulls or Bears: Who Wins in the End?

Will Budget 2026 be Bullish or Bearish?

- Bull Case: If the government announces meaningful LTCG tax rationalisation, higher exemptions, rate cuts, or new incentives, it is a signal for pro-market intent, which could induce euphoria, new inflows into the market, and higher indices. This would win the Bulls by furthering the narrative of India’s growth story and deepening its capital markets.

- Bear Case: Stale logic, revenue ambivalence, and status quo in no changes will disappoint, especially with prevailing global turbulence. This could lead to profit-taking and major corrections. The Bears win if the sentiment is anti-investor bias and sour on passive vs. active investing.

The most likely outcome is the middle road. Targeted changes seem likely vs. broad omissions. Bulls are likely if changes stimulate long-term investing, but if expectations outweigh the hoped reality, Bears will prevail in the short run.

 

 

Final Thoughts

Budget 2026 will likely cause significant changes to how the LTCG tax will work and how it will affect market sentiments. Positive changes in tax exemptions, lower tax rates, or new changes to the tax structure will encourage rationalisation of the LTCG Tax and will promote investments and help develop the Indian equities market. 

It is important to prepare for volatility in the stock market around the budget announcement. Focus on the fundamentals, diversify your investments, and don't overreact to sudden changes. In the end, the outcome of the stock market will be determined by how the announcement of the tax changes aligns with everyone's expectations, and not how much detail is provided.

As February 1 nears, the tension in the marketplaces will grow. Whether or not rationalisation will cause a bull run, or if the marketplaces slow down, will be answered in the budget. In the meantime, there are strategies we can put in place to prepare for whatever outcome is in store.

DISCLAIMER: This blog is NOT any buy or sell recommendation. No investment or trading advice is given. The content is purely for educational and information purposes only. Always consult your eligible financial advisor for investment-related decisions.