Market participants seek equity tax relief ahead of Budget

The demand from market participants for capital market tax relief, particularly a higher exemption limit on Long-Term Capital Gains (LTCG) ahead of the Union Budget for 2026-27, is a recurring yet crucial discussion point in India's economic policy landscape. This plea underscores the perpetual balancing act between government revenue generation and fostering a vibrant investment climate.

**Background Context and What Happened:**

Capital gains refer to the profit an investor makes from selling an asset (like shares, property, or gold) for a price higher than its purchase price. In India, capital gains are categorized into short-term (held for less than 12 months for equities) and long-term (held for more than 12 months). Historically, Long-Term Capital Gains (LTCG) on listed equities were exempt from tax from 2004, a move aimed at boosting capital market participation. This exemption was, however, coupled with the introduction of the Securities Transaction Tax (STT) in 2004, which is levied on every purchase and sale of equities on stock exchanges. The landscape changed significantly in the Union Budget 2018, when LTCG tax on equities was reintroduced. Under Section 112A of the Income Tax Act, 1961, gains exceeding ₹1 lakh from the sale of listed equity shares or equity-oriented mutual funds are taxed at 10% without the benefit of indexation. This reintroduction was justified by the government as a measure to bring parity with other asset classes and to tap into the buoyant equity market for revenue.

Currently, market participants, including institutional investors, stockbrokers, mutual fund houses, and individual investors, are urging the government to reconsider this taxation. Their primary demand is to increase the existing exemption limit of ₹1 lakh, which they argue has remained stagnant despite significant inflation and market growth over the years, making it less relevant for even small investors. Other suggestions include reintroducing indexation benefits, reducing the tax rate, or even abolishing LTCG tax in favour of a higher STT, similar to the pre-2018 regime. These proposals are typically submitted to the Ministry of Finance during pre-Budget consultations, which are crucial for shaping the annual financial statement.

**Key Stakeholders Involved:**

1. **Government (Ministry of Finance):** The primary decision-maker, responsible for fiscal policy, revenue generation, and economic stability. They weigh the demands against the need to fund public expenditure and manage the fiscal deficit.

2. **Market Participants (Investors, Stock Exchanges, Brokers, Mutual Funds, FIIs, DIIs):** These are the entities directly affected by capital gains tax. They advocate for tax relief to enhance investor returns, stimulate trading volumes, attract foreign investment, and deepen market participation.

3. **Securities and Exchange Board of India (SEBI):** While not directly involved in tax policy, SEBI, as the capital market regulator, has an interest in market stability, investor protection, and robust market infrastructure, all of which can be influenced by tax policies.

4. **Tax Policy Think Tanks and Economists:** These groups provide research and recommendations, often influencing public and policy discourse on taxation.

**Significance for India:**

Easing capital market taxation holds significant implications for India. Economically, a more favorable tax regime can encourage greater domestic savings to flow into equity markets, fostering capital formation and supporting economic growth. It can also make India a more attractive destination for Foreign Institutional Investors (FIIs), bringing in much-needed foreign exchange and investment. A vibrant equity market is crucial for companies to raise capital, facilitating expansion and job creation. For individual investors, higher exemption limits or lower tax rates mean better post-tax returns, potentially encouraging broader retail participation and financial inclusion. Politically, such decisions reflect the government's stance on balancing welfare spending with market-friendly policies. Socially, increased investment opportunities can lead to wealth creation for a larger segment of the population, provided there is adequate financial literacy and access.

**Historical Context and Future Implications:**

The debate around capital gains tax is not new. The abolition of LTCG tax on equities in 2004 by then Finance Minister P. Chidambaram, alongside the introduction of STT, was a landmark reform that significantly boosted India's equity markets. The reintroduction in 2018 by then Finance Minister Arun Jaitley marked a shift, reflecting a need for additional revenue and perhaps a perceived 'fairness' in taxing all capital gains. The current demand for relief aligns with the historical pattern of market participants consistently pushing for a more liberal tax regime. The future implications depend heavily on the government's decision in the upcoming Budget. If tax relief is granted, it could lead to renewed investor confidence, potentially driving up market valuations and trading volumes. This could, in turn, lead to higher STT collections, partially offsetting any direct revenue loss from LTCG. Conversely, if no significant changes are made, the debate will continue, potentially affecting long-term investment decisions and market sentiment, particularly for domestic investors. The government's decision will also be watched closely by global investors as an indicator of India's commitment to a market-friendly economic environment, impacting capital flows.

**Related Constitutional Articles, Acts, or Policies:**

Taxation in India is primarily governed by **Article 265** of the Constitution, which states that "No tax shall be levied or collected except by authority of law." This article underscores the principle that taxation must have legislative backing. The power to levy taxes is distributed between the Union and State governments as per **Article 246** and the **Seventh Schedule**. Taxes on income, other than agricultural income, fall under **Entry 82 of the Union List**, granting the Parliament exclusive power to legislate on this subject. The specific provisions for capital gains tax are enshrined in the **Income Tax Act, 1961**, particularly Sections 45 to 55A dealing with 'Capital Gains' and specifically **Section 112A** for LTCG on listed equities. The annual **Finance Act**, passed as part of the Union Budget, introduces amendments and changes to the Income Tax Act and other tax laws. The government's fiscal policy, announced through the Union Budget, is the overarching framework guiding these tax decisions.