SYNOPSIS: India’s capital gains tax journey has evolved from abolition to reintroduction and higher rates, shaping investor behaviour, market participation and foreign flows – now firmly in focus ahead of Union Budget 2026.
With the Union Budget 2026-27 just two days away, and like every year, there’s a lot of curiosity about what it might bring for us. Investors, in particular, are watching closely – hoping for positive cues that could cheer the stock markets.
Amidst this, one topic that’s firmly in focus this time is Long-Term Capital Gains (LTCG) and Short-Term Capital Gains (STCG) taxes. With equity returns under pressure and foreign investors pulling money out, many are asking whether it’s time for a rethink.
At its core, capital gains are simply the profits you make when you sell an asset, such as shares, mutual funds, or property, for more than what you paid for it. In the case of equities, these gains are classified based on how long you hold the investment. If listed shares are sold within one year of buying, the gains are treated as STCG; if they’re sold after one year, they qualify as LTCG. The same logic applies when calculating losses.
That naturally leads to a few big questions. When were these taxes introduced? Why did they come into existence? How have they changed over the years – and will they change again? In this article, we break it all down for you in a simple, easy-to-understand way.
The early years: Capital gains take shape
India first introduced capital gains tax in 1947, soon after Independence, under the Income-tax Act, with the idea to curb excessive speculation after World War II. However, the move didn’t last long. Within two years, the tax was abolished as policymakers felt it was hurting stock market growth and investor participation.
Fast forward to the early 1990s, LTCG on equities were taxed at 20 percent, with the benefit of indexation. What is this indexation? It is a method that simply adjusts the purchase price of an asset for inflation before calculating capital gains. By increasing the cost base, it lowers taxable income and better reflects the impact of inflation over time.
At the time, STCG didn’t exist as a separate concept. Equity gains were largely taxed under a single framework, regardless of holding period. While this system remained in place through much of the 1990s, high tax rates and complicated calculations were often criticised for discouraging broader participation in equity markets.
The Big 2004 Shift: LTCG Abolished, STT Introduced
A major turning point in India’s equity taxation came in 2004. From 1st October 2004, the government introduced the Securities Transaction Tax (STT) under the Finance Act, 2004. In simple terms, STT is a small tax charged every time you buy/sell securities on Indian stock exchanges. It applies across all equity and derivative transactions, including stocks, equity futures, and options, and is collected right at the time of the transaction.
The logic was simple: collect tax at the source, reduce evasion, improve transparency, and make compliance easier. For the government, it also meant a steady and predictable revenue stream from a fast-growing market.
At the same time, the government made a bold and investor-friendly move of abolishing Long-Term Capital Gains (LTCG) tax on listed equities held for more than one year. STCG continued to be taxed, but at a concessional rate, which was later standardised at 15 percent.
The result? Between 2004 and 2018 witnessed a surge in retail participation, strong mutual fund inflows, and rising foreign investor interest, helping deepen and broaden India’s equity markets.
LTCG Reintroduction: A major change in 2018
For nearly 14 years after 2004, LTCG tax on listed equities simply didn’t exist. Many market participants assumed STT would remain the primary tax on stock gains. However, in Budget 2018, presented by then FM Arun Jaitley, LTCG was reintroduced on equities and equity mutual fund schemes, citing the need for greater tax equity and revenue mobilisation.
From 1st April 2018, long-term gains above Rs. 1 lakh in a financial year were taxed at 10 percent, without indexation benefits. Importantly, STT continued alongside LTCG, meaning investors were now paying both transaction tax and capital gains tax.
To be clear, STT rates remained unchanged – 0.1 percent on buying and selling direct equity shares, and 0.001 percent on selling equity mutual fund units. So while LTCG was back, the transaction-level tax never went away.
While LTCG, STCG and STT were not enough, Budget 2018 also introduced a 10 percent Dividend Distribution Tax (DDT) on mutual funds. This was to ensure that investors don’t switch to dividend plans to escape paying the new 10 percent LTCG tax. This tax was paid by the mutual fund house out of its distributable surplus before paying dividends to investors.
Here’s where it felt a bit uneven: LTCG applied only if gains exceeded Rs. 1 lakh, but DDT applied to all equity MF investors, regardless of how small their investment or gains were. This added another layer of tax friction for equity investors.
Following these changes, the tax structure remained largely unchanged for several years. STCG on equities continued to be taxed at 15 percent, while LTCG above Rs. 1 lakh stayed at 10 percent, firmly establishing a dual-tax framework for equity investments.
The 2024 Reset: Higher Taxes, Tighter Rules
The next major reset arrived with the Union Budget 2024. This time, the focus was clearly on cooling short-term speculation and bringing equity taxation more in line with other asset classes.
This time, the government raised the STCG tax on equities from 15 percent to 20 percent, making quick trades more expensive from a tax perspective. At the same time, LTCG tax was increased from 10 percent to 12.5 percent.
To cushion the impact on small retail investors, the government also raised the LTCG exemption limit from Rs. 1 lakh to Rs. 1.25 lakh per financial year. That said, one thing many investors were hoping for, the return of indexation benefits, did not happen. And let’s not forget, capital gains tax isn’t the only bite. STT is charged on every trade, and GST on brokerage fees is also deducted, quietly adding up in the background.
How LTCG & STCG Affected FII/FPI Inflows
With Budget 2026 around the corner, calls for tax relief are getting louder than ever. This time, the noise is hard to ignore! Persistent foreign investor selling, muted equity returns, and rising volatility have put capital gains taxes firmly under the spotlight.
But the numbers tell a sobering story. FIIs sold over Rs. 1.6 lakh crore worth of Indian equities in 2025, and we are all well aware that this selling trend has continued into early 2026.
This has led to growing calls for rationalising capital gains taxes, whether through a cut in LTCG or STCG rates, a higher exemption threshold for long-term gains, or clearer signals on broader capital market reforms. Supporters believe such steps could help revive foreign inflows and restore confidence.
That said, there’s also a note of caution. Any meaningful rollback in taxes would have fiscal implications, and the government will need to balance investor expectations with revenue priorities. The big question now is whether Budget 2026 strikes that balance.
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