LTCG tax hurting small investors? Why Budget 2026 should rethink capital gains relief

Chartered accountants have pointed out that based on the most recent publicly available data (AY 2023-24), less than 5% of the total long-term capital gains (LTCG) are generated by taxpayers whose total income is under Rs 10 lakh. This data is from the Income-tax Return Statistics for AY 2023-24, released by the Income Tax Department.

The data indocate that a significant share of LTCG is concentrated among higher-income groups, while lower-income taxpayers contribute only a marginal proportion to the overall LTCG collections.



Some experts argue that individuals with higher income are paying more in LTCG taxes because they have a greater ability to invest compared to middle and lower income class taxpayers. Therefore, by this logic, the rich and high earners shouldn’t be punished with higher LTCG taxes just because they have more money to invest.

However, some experts contend providing relief to lower and middle class taxpayers would increase their disposable income. For many of these individuals, their main source of income is salary, which is taxed before they invest and earn LTCG.

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What does the past data show?

The data shows that in AY 2023-24, individuals earning between Rs 1.5 lakh and less than Rs 25 lakh paid less LTCG tax than those in higher income ranges.

Source: Income-tax Return Statistics for AY 2023-24

Chartered Accountant Ajay Rotti said on X: “All the people talking about reduction or exemption of long term capital gains tax.... see this ....In short the point is LTCG is being paid really by the rich and the super rich. Don't get confused and make it a "common man" or "middle class" issue.”

According to Abheet Sachdeva, Partner, Nangia Global, for the middle-income segment, salary income remains the primary source of earnings and is taxed at relatively higher marginal rates. In contrast, avenues for meaningful deductions and exemptions under the new tax regime are limited.

Sachdeva cites official data and says that while household financial savings in India have moderated in recent years, the cost of living and asset prices have risen sharply.

Sachdeva says: “Enhancing post-tax disposable income and providing structured incentives for long-term investing would not only promote personal financial security but also deepen capital markets and support sustainable economic growth.”

According to Sachdeva, such reforms would signal a clear policy intent to incentivise honest taxpayers and foster inclusive wealth generation over the long term.

Also read: Zero tax up to Rs 12 lakh, but not on capital gains? Why Budget 2026 must fix this anomaly

Chartered Accountant Suresh Surana says the argument that long-term capital gains (LTCG) relief for small and middle class should be introduced merely because most LTCG is earned by high-income taxpayers is, by itself, not a strong justification for exemptions or rate cuts in Budget 2026.

The period of holding that determines whether a gain is “long term” is uniform for all taxpayers regardless of their total income.

Surana says: “Accordingly, the tax framework already offers an equitable tax implication. As such, any taxpayer, whether small, middle-class or high-income, can access concessional LTCG treatment by holding investments for the prescribed duration.”

Surana says from a policy perspective, promoting long-term savings does not require income-based differentiation within capital gains taxation.

Surana says: “The incentive to invest for the long term is incorporated through lower tax rates compared to short-term gains. When a small or middle-income taxpayer holds an asset for the long term, the tax outcome is, in principle, the same as that for a higher-income taxpayer.”

Thus, introducing additional income-linked relief within LTCG would dilute neutrality, points out Surana.

Surana says: “Further, the higher share of LTCG reported by high-income taxpayers reflects their greater capacity to invest and hold assets, rather than any preferential tax treatment.”

What reforms in capital gains tax structure for LTCG should Budget 2026 consider?

Sachdeva, said to ET Wealth Online: In furtherance of the government’s stated objective of easing the tax burden on the middle-income group, the following reforms may be considered in Union Budget 2026:

Targeted long-term capital gains (LTCG) relief under the new tax regime

Sachdeva says that in the case of taxpayers opting for the new tax regime, the Government may consider exempting long-term capital gains up to a higher, clearly defined lifetime threshold (for example, Rs 25–50 lakh per taxpayer).

Sachdeva says: “This would provide meaningful relief to salaried and middle-income taxpayers, for whom long-term investing is often the only viable route to wealth accumulation.”

According to Sachdeva, given that India’s tax base remains narrow, with less than 2% of the population paying income tax, such once-in-a-lifetime exemption can reward tax compliance without materially eroding revenues.

Investment-linked LTCG exemption to incentivise asset creation

According to Sachdeva, the government could consider introducing an investment-linked incentive under the new tax regime, whereby if a specified percentage of total income (say 10–20%) is invested in notified capital assets and held for the long term, either (1) deduction from total income is provided up to the amount of investment or (2) long term capital gains on such investment are exempt.

Sachdeva says: “This would encourage disciplined, long-horizon investments in productive assets such as equities, infrastructure-linked instruments, and other growth-oriented avenues, while aligning household savings with national capital formation goals.”

What about STCG reforms?

Sachdeva says that while parity has been achieved for long-term capital gains tax rate on listed and unlisted equities at 12.5%, a clear asymmetry continues for short-term capital gains—taxed at 20% for listed equities but at applicable tax rates for unlisted equities.

Sachdeva says: “The government may consider extending similar parity to short-term gains on unlisted equities by taxing them at a uniform 20%.”

According to Sachdeva, such a move would enhance simplicity, improve tax certainty, and encourage long-term risk capital and private equity investments without materially impacting revenue.