Ahead of the Union Budget 2026, tax experts have indicated that while major structural changes in capital gains taxation may be limited, investors can expect simplification, procedural relief and correction of anomalies in the existing framework, particularly for mutual fund and asset investors.

Capital gains taxation has undergone several changes over the past two years. In the July 2024 Budget, the government rationalised tax rates for long-term and short-term capital gains and removed indexation benefits.

Holding periods were also revised, with listed equity shares and listed securities classified as long-term after 12 months, while other assets such as property, gold, silver and unlisted securities were assigned a 24-month holding period.

Holding Period Rules

Vivek Jalan, Partner at Tax Connect Advisory, said this dual holding period has created confusion for taxpayers. “The tax department has made long-term capital gains tax 12.5 per cent across sectors and removed indexation. In that situation, keeping two different holding periods of 12 months and 24 months does not make much sense,” he said.

Jalan said investors expect relief on this front. “It is expected that the holding period may be rationalised and kept at 12 months across sectors,” he said. Explaining the impact, he said that investors in gold and silver are particularly affected.

“At present, gold and silver prices are very high. If an investor sells gold or silver after 12 months, the gain is still taxed at 20 per cent. If the holding period is reduced, the tax rate would come down to 12.5 per cent,” he said.

Another issue discussed by experts is the interaction between capital gains taxation and the rebate available under Section 87A.

In the February 2025 Budget, the government announced that income up to Rs 12 lakh would not attract tax under the new regime. However, Jalan pointed out that this benefit does not fully apply if the income includes capital gains.

“The guarantee of tax-free income up to Rs 12 lakh comes with a rider. If there is long-term or short-term capital gain, the benefit is not available,” he said.

He added that while income between Rs 4 lakh and Rs 12 lakh qualifies for a rebate, capital gains within this range continue to be taxed. “It is expected that this rider may be relaxed in the Budget,” Jalan said.

Experts also discussed expectations around the long-term capital gains exemption limit for equity investments, which currently stands at Rs 1 lakh.

DC Patwari, Chairman of the Metropolitan Stock Exchange Board and former Principal Chief Commissioner of Income Tax, said an increase in the exemption limit is possible. “We can expect that the exemption limit of Rs 1 lakh may be increased to Rs 2 lakh. This expectation is justified and will benefit small investors,” he said.

Experts also flagged anomalies in buyback taxation introduced earlier. Jalan said shareholders are currently taxed on the entire buyback amount without deduction for cost of acquisition. “This is an anomalous provision, and there is a strong expectation of relief,” he said.

Litigation related to capital gains exemption under Sections 54 and 54F was also highlighted. Jalan said taxpayers often face disputes when property possession is delayed.

“If a taxpayer invests within three years but the developer hands over possession after four or five years, litigation arises even though the taxpayer has already invested the amount,” he said.

Another area of concern is the timing of capital gains for advance tax purposes. Jalan said that if shares are sold later in the financial year, interest is automatically calculated by the system. “In such cases, clarification is needed because advance tax could not have been paid earlier,” he said.

On the issue of set-off of losses, experts indicated that major changes are unlikely. Jalan explained that long-term capital losses can be set off only against long-term gains due to different tax rates.

“If long-term losses are allowed to be set off against short-term gains, the government will face a revenue loss. That is why this provision exists,” he said.

Overall, experts said Budget 2026 is expected to focus on simplifying capital gains taxation, addressing procedural gaps and reducing litigation, rather than introducing fresh structural reforms.

“Most changes have already been implemented over the last two years,” Patwari said. “Now the need is to remove glitches and make compliance easier for taxpayers.”