What Is LTCG and How Does It Affect Your Stock Returns?
The Indian stock market rallied after signals of a possible LTCG tax review. Find out why investors are hopeful and what changes may come in the next budget.
MARKET NEWS
Harsh Garg
10/15/20264 min read
LTCG is the tax you have to pay when you sell an investment that you've held for a long time and you make a profit from it. For shares that are listed, equity mutual funds, and eligible equity ETFs, you need to hold them for over 12 months.
Currently, if you make long-term gains of more than Rs 1.25 lakh in a financial year, you have to pay tax at 12.5%, along with the surcharge and cess that apply. This rule started after the July 2024 budget, which increased the rate from 10% and raised the exemption limit from Rs 1 lakh.
What is LTCG?
On October 13, 2026, Finance Minister Nirmala Sitharaman stated that the discussion about LTCG and STT is "healthy" and that she is willing to hear what investors have to say. However, she also mentioned that it's still too early to know what the government will ultimately decide.
The comments were made as the process to prepare the Union Budget 2027 has begun. Investors and people involved in the market are now waiting to see if the long-term capital gains tax on equities will be reduced, or if the exemption amount will be increased, or, in some plans, maybe the tax will be completely removed.
SBI Research has recommended removing the long-term capital gains tax on shares and raising the minimum time you need to hold them to two or three years. The plan is to promote investing for the long term and decrease the amount of money that is invested for quick gains.
Latest news on LTCG
After the Finance Minister spoke, the Sensex increased by more than 1,100 points, and the Nifty went up by over 350 points during that session. Both main stock market indexes finished the day with gains of over 1%.
The rally took place because investors viewed the comments as an indication that the government is aware of the worries related to high taxes and the costs of transactions. This was mostly about feelings rather than an actual tax reduction.
Why the market rallied
LTCG has a direct impact on the overall profit an investor makes once they sell their shares or equity mutual funds. If the tax rate goes down or the exemption limit goes up, investors get to keep more of their earnings.
For example, if an investor earns Rs 3 lakh from long-term equity gains, the first Rs 1.25 lakh is not taxed. The remaining amount of Rs 1.75 lakh is taxed at a rate of 12.5%, resulting in a tax of Rs 21,875 before adding surcharge and cess. If the exemption limit or tax rate changes, the final tax amount might also change.
How LTCG affects investors
Better investor sentiment: Any sign of tax relief can make the market feel more positive. Investors might feel more willing to put their money into stocks because the return they expect after paying taxes is better. This could be seen right away in the market's quick rise following the Finance Minister's announcement.
More long-term investment: A smaller tax on long-term capital gains might make people want to keep their investments for a longer time. This could help stop people from selling too much in a rush and keep the market more steady. SBI Research's plan to lengthen the holding period is based on this idea.
Possible return of foreign investors: Foreign Portfolio Investors, or FPIs, have been selling more Indian stocks than buying them for a long time this year. Industry groups say that the way India taxes capital gains makes it more expensive for people to invest compared to other countries. If the long-term capital gains tax or the securities transaction tax is lowered, India might become a better choice for foreign investors. This could help raise stock prices, especially for big companies where foreign investors put in a lot of money. However, experts are still unsure if tax breaks alone can keep foreign investors flowing in consistently.
Higher trading and mutual fund activity: Equity mutual funds and ETFs also get better tax treatment since many people use them to build wealth over a long period of time. Lower tax rates can help more people invest through SIPs, make one-time investments, and take more part in the market.
Government revenue concern: The government gets a lot of money from taxes like LTCG, STT, stamp duty, and other taxes related to the market. Reports say the government gets more than Rs 2 lakh crore from these sources. So, the government might want to take a fair and balanced approach. It might help a little without totally getting rid of LTCG, since removing it entirely could lower tax revenue.
Possible impact on the stock market
There are three broad possibilities:
No change: The government may keep the current 12.5% rate and Rs 1.25 lakh exemption.
Partial relief: It may raise the exemption limit or slightly reduce the tax rate.
Major reform: It may remove LTCG on equities, possibly along with a longer holding period, as suggested by some research proposals.
(At this point, investors should consider LTCG relief as something that might happen, but they shouldn't assume it will definitely occur. The Finance Minister has not made any official plan to take away or lower the tax.)
What could help next?
Do not make investment decisions based only on tax news expectations.
Focus on the quality of the company or mutual fund, valuation, and your long-term goal.
Remember that tax rules can change in the budget, so avoid last-minute selling just to chase tax benefits.
Keep a long-term view, because markets may move sharply on news but settle based on earnings, economic growth, interest rates, and global conditions.
What should an investor do?
Ahead of the Union Budget 2027, there is hope for tax relief thanks to the most recent LTCG news. Reducing or eliminating LTCG could boost investor confidence, encourage long-term investing, and potentially draw in foreign funding. However, the current rule—12.5% LTCG on stock gains above Rs 1.25 lakh annually—remains in place until an official announcement is made.
Bottom line
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