Budget 2026 made significant changes to the long-term capital gains tax framework for equity mutual funds and listed stocks. The LTCG tax rate on equity funds and stocks held for more than one year has been increased from 10% to 12.5%, with the Rs 1 lakh annual exemption limit retained. This means that gains above Rs 1 lakh per financial year from equity mutual funds and listed shares will now attract 12.5% tax without the benefit of indexation.
The Budget also extended the definition of long-term to two years for equity-oriented balanced advantage funds and multi-asset funds — up from one year previously — aligning them with international taxation norms. This change primarily impacts investors who use these hybrid funds for short-to-medium term goals, as they will need to hold for 24 months instead of 12 months to qualify for LTCG treatment rather than STCG (which is taxed at 20% for equity).
For mutual fund investors doing systematic investment plans, the taxation is computed separately for each SIP instalment with its own holding period calculation. Most SIP investors accumulate units over years and sell periodically, resulting in a mix of short and long-term capital gains. The new rates are applicable to redemptions made on or after April 1, 2026, regardless of when the units were purchased. Financial advisors recommend tax loss harvesting at year-end for investors with significant unrealised short-term losses to optimise the overall tax liability from mutual fund portfolios.
