LTCG Tax on Mutual Funds & Stocks: What Changed in Budget 2026?

Every year around the budget time, one question echoes louder than any other across trading floors, WhatsApp groups, and chartered accountant offices alike: “What’s happening with capital gains tax?”

And this year was no different.

After all, the sweeping capital gains overhaul of July 2024 had already shaken portfolios. The big question was, would Budget 2026 bring more pain or some much-needed relief?

The short answer? The government chose stability over disruption. But the devil is always in the details.

Here is a complete breakdown of what changed, what stayed the same, and, most critically, what every investor filing an ITR this season needs to know.

The July 2024 Overhaul: A Quick Recap (Because Everything Starts Here)

Before diving into Budget 2026, it is essential to understand the foundation it builds upon. In the Union Budget presented on July 23, 2024, the government introduced the most significant capital gains tax reform in over a decade:

• LTCG tax on equity and equity mutual funds was raised from 10% to 12.5%.
• STCG tax on equity was hiked from 15% to 20%.
• The annual LTCG exemption limit was increased from ₹1 lakh to ₹1.25 lakh under Section 112A.
• A uniform 12.5% LTCG rate was introduced across almost all asset classes, equity, debt, gold, and real estate, replacing the earlier patchwork of rates.
• Indexation benefit was removed for most assets acquired after July 23, 2024 (with a limited grandfathering provision for real estate).
• Holding periods were simplified: 12 months for listed equity and equity funds; 24 months for most other assets.

This was the new playing field. And Budget 2026 chose not to redraw the lines.

Budget 2026: What Actually Changed for Capital Gains?

1. LTCG Tax Rate: Unchanged at 12.5%

The LTCG tax rate on equity shares, equity-oriented mutual funds, and all other long-term capital assets remains at 12.5% for FY 2026-27. Despite widespread industry lobbying, including AMFI’s formal recommendation to reduce the rate or increase the exemption limit to ₹2 lakh, the government held firm.

2. LTCG Exemption Limit: Still ₹1.25 Lakh

The annual exemption threshold under Section 112A, the amount of LTCG from listed equity and equity mutual funds that is completely tax-free, stays at ₹1.25 lakh per financial year.

What this means practically: If an investor books ₹3 lakh in long-term gains from equity mutual funds in FY 2026-27, the first ₹1.25 lakh is tax-free. The remaining ₹1.75 lakh is taxed at 12.5%, resulting in a tax liability of ₹21,875 (before surcharge and cess).

3. STCG Tax Rate: Still 20% on Equity

Short-term capital gains (holding period of less than 12 months for equity) continue to be taxed at a flat 20%. This higher rate, introduced in July 2024, was designed to discourage speculative short-term trading.

4. STT Hike on Commodity Futures 

While LTCG rates stayed untouched, Budget 2026 did deliver a notable change in Securities Transaction Tax. STT on commodity futures was hiked from 0.02% to 0.05%, a 150% increase.

This does not directly affect equity LTCG, but it signals the government’s continued stance against speculative activity, and traders in the F&O space should take note.

5. Dividend Income: No More Interest Deduction from April 2026

Here is a change that flew under the radar for many investors. Starting April 1, 2026, investors can no longer deduct any interest expenditure incurred to earn dividend income.

Previously, if an investor had borrowed money to invest in dividend-paying stocks or mutual funds, the interest cost could be claimed as a deduction against dividend income (up to 20% of gross dividends). That benefit is now gone.

For high-net-worth investors who used leveraged strategies to invest in high-dividend-yield stocks, this is a tangible increase in effective tax outgo.

6. New Income Tax Act & Capital Gains Framework

Budget 2026 also progressed the codification of the new Income Tax Act, which aims to simplify and consolidate the existing tax code. While the core capital gains rates remain unchanged, the new act reorganises the provisions under clearer sections, making compliance easier for investors and their CAs.

The Complete LTCG Tax Structure for FY 2026-27 (AY 2027-28)

Here is the definitive tax table every investor should bookmark:

7 Proven Strategies to Minimise LTCG Tax in FY 2026-27

1. Tax-Gain Harvesting: Use the  ₹1.25 Lakh Exemption Every Year

This is arguably the most powerful yet underutilised strategy. Every financial year, if long-term equity gains are below ₹1.25 lakh, investors should book those profits, pay zero tax, and reinvest immediately. This resets the cost basis higher, reducing future tax liability.

Example: An investor holds equity mutual fund units with ₹1 lakh in unrealised LTCG as of March 2027. By redeeming and immediately reinvesting (in the same or a similar fund), the entire ₹1 lakh gain is tax-free. The new purchase price becomes the higher NAV, and future gains are calculated from this reset base.

2. Tax-Loss Harvesting Before March 31

If there are unrealised losses in some holdings alongside taxable gains in others, selling the loss-making investments crystallises the loss, which can offset gains:

• Short-term capital losses (STCL) can offset both STCG and LTCG.
• Long-term capital losses (LTCL) can offset only LTCG.
• Unused losses can be carried forward for up to 8 assessment years.

Important: Complete trades by March 28 to ensure T+1 settlement clears within FY 2026-27.

3. Stagger Redemptions Across Financial Years

Instead of redeeming a large holding in one shot, spreading redemptions across two financial years allows use of the ₹1.25 lakh exemption twice. On a ₹3 lakh gain, this could save ₹15,625 in tax.

4. Choose Growth Plans Over Dividend Plans

Dividend income from mutual funds is taxed at the investor’s slab rate with no exemption threshold. LTCG, on the other hand, benefits from the ₹ 1.25 lakh exemption and the lower 12.5% rate. Growth plans are almost always more tax-efficient for investors in the 20%+ tax bracket.

5. Consider ELSS for Dual Benefits

Equity Linked Savings Schemes (ELSS) offer a Section 80C deduction of up to ₹1.5 lakh (under the old tax regime) and, after the 3-year lock-in, gains qualify as LTCG under Section 112A with the same ₹1.25 lakh exemption. It is one of the rare instruments that offers both a deduction at entry and a concessional rate at exit.

Final Takeaway

Budget 2026 did not deliver the sweeping capital gains relief that many investors hoped for. But it also did not introduce new pain — and in the world of tax policy, predictability has its own value.

The smart move for every investor this financial year is not to wait for policy changes but to work within the current framework. Use the ₹1.25 lakh exemption religiously. Harvest losses strategically. Time SIP redemptions carefully. And most importantly, file the ITR accurately and on time.

The rules are set. The game is on. The question is: how well will investors play it?