Capital gain tax after Budget 2025: Latest LTCG, STCG rates on various assets post Budget 2025

Budget 2025 impact: Finance Minister Nirmala Sitharaman introduced minor adjustments to the existing capital gains tax framework after overhauling it in the July 2024 Budget. The tax rates and holding periods for assets have been kept unchanged, determining whether they are subject to long-term capital gains or short-term. Consequently, the rules governing Long Term Capital Gains Tax (LTCG) and Short Term Capital Gains Tax (STCG) will persist for the financial year 2026 (Assessment Year 2026-27).

Various types of capital assets, such as listed equity shares, mutual funds, tax-free bonds, debentures, unlisted shares, immovable property, and other financial instruments, are subject to different tax treatments based on their holding periods. This classification dictates whether the gains are considered as LTCG or STCG.

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ULIPs

Effective April 1, 2026, Unit Linked Insurance Plans (ULIPs) with annual premiums exceeding Rs 2.5 lakh will be subject to a long-term capital gains (LTCG) tax rate of 12.5%. This decision aims to provide greater clarity and equity in the taxation of ULIPs, a popular financial product that combines insurance coverage with investments in equity markets.

There was previous uncertainty regarding the taxation of long-term gains (held for over a year) at a rate of 12.5%. The question arose as to whether these gains should be classified as long-term capital gains (LTCG) or income from other sources.

Also, there was confusion over the tax treatment of ULIP gains, particularly for those with annual premiums exceeding Rs 2.5 lakh. Unlike traditional insurance policies that invest premiums in debt instruments, ULIPs allocate a significant portion of the premium to stocks. As a result, it was deemed inappropriate to categorise ULIPs as regular insurance policies for tax purposes, prompting the implementation of this revised tax framework. 

Sitharaman announced that ULIPs with an annual premium exceeding Rs 2.5 lakh will now be subject to capital gains tax, bringing them in line with equity mutual funds. This adjustment follows a significant alteration in the taxation of ULIPs in the 2021 budget, which imposed taxes on returns from ULIPs with premiums over Rs 2.5 lakh. Nevertheless, there had been uncertainty surrounding the tax treatment of these policies upon redemption, causing confusion among investors.

“Sub-section (1B) of the said section provides that any amount received under a ULIP, where the exemption under Section 10(10D) does not apply, shall be taxed under the head of capital gains and deemed as income of the recipient for the year in which it is received. The amendment extends this provision to all such ULIPs and will be effective from April 1, 2026, impacting assessment year 2026-27 onwards,” says the Finance Bill 2025.

FIIs

The Finance Bill 2025 has proposed an increase in the long-term capital gains (LTCG) tax rate on income from certain securities from 10% to 12.5% starting on April 1, 2026. This follows a previous hike to 12.5% for listed equity shares, equity-oriented mutual funds, and units of business trusts sold by foreign institutional investors (FIIs) in the previous year’s Budget. 

In the case of specified funds and FIIs, the tax rates for long-term gains mentioned in section 112A have been aligned with those applicable to residents. However, the income tax rate for long-term capital gains not covered under section 112A remains unchanged at 10% as per the Finance (No.2) Act, 2024, as proposed in the Finance Bill 2025.

“It is proposed to amend the provisions of section 115AD to provide that income-tax on the income by way of long-term capital gains on transfer of securities (other than units referred to in section 115AB) not referred to in section 112A, if any, included in the total income, shall be calculated at the rate of 12.5 per cent,” the Bill said.

“These amendments will take effect from the April 1, 2026, and shall accordingly, apply in relation to the assessment year 2026-27 and subsequent assessment years,” it said.

In 2024, there was a significant decrease in foreign institutional investor (FII) activity, with only Rs 1,600 crore being invested on a net basis into the Indian equity market. This was a sharp decline of 99% compared to the robust inflows of Rs 1.71 lakh crore seen in the previous year.

At the beginning of 2024, FIIs began the year by purchasing Rs 1.12 lakh crore worth of Indian equities in the first nine months. However, from October 2024 onwards, they sold stocks totaling over Rs 2.63 lakh crore due to the economic slowdown and lower corporate earnings.

Sunil Gidwani, Partner, Nangia Andersen, said: “Last year when the LTCG tax rates were changed for residents, the tax rates for FPIs on shares, equity mutual funds and business trusts were changed to 12.5 per cent, too. But LTCG on other assets such as G-secs, bonds and NCDs were left out, perhaps inadvertently, and continued to be taxed at 10 per cent. This is sought to be corrected.”

Alternative Investment Funds

Income generated by Category I and II Alternative Investment Funds (AIFs) will now be treated as capital gains and subject to a tax rate of 12.5%. Previously, there was no specific provision regarding the tax treatment of such income. However, the definition of capital asset has been expanded to include gains made by AIFs under the Income Tax Act.

Moving forward, if this income were to be classified as business income, it would be subject to a higher tax rate of 30% for residents and up to 39% for non-residents. Category I and II AIFs primarily invest in unlisted companies, debt instruments, and the infrastructure sector, while Category III AIFs focus on listed companies.

Currently, Category I and II AIFs benefit from pass-through taxation, whereas Category III AIFs do not receive the same treatment. This amendment will come into effect on April 1, 2026, and will be applicable for the assessment year 2026-27.



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