Mutual Fund Wishlist 2026: Will the Budget Increase the Equity LTCG Exemption to ₹2 Lakh

Written by Jainam Resources

Last Updated on: February 2, 2026

As Budget 2026 gets closer, mutual fund investors and long-term investors are becoming more hopeful about a significant topic of conversation: may the government boost the equity LTCG exemption limit to 2 lakh? As more people invest in stocks via SIPs, direct mutual funds, and digital platforms, the chances of getting a break on capital gains taxes are becoming better.

This blog explains the LTCG exemption, the current rules, historical patterns, and how a higher exemption maximum may impact mutual fund strategies, especially for elderly people and long-term investors.

What Is LTCG on Equity Mutual Funds?

Meaning of Long-Term Capital Gains on Equity

If you sell units of equity mutual funds after holding them for more than one year, the gains are classified as Long-Term Capital Gains (LTCG), regardless of the profit amount. As per the Income Tax Act, 1961, tax is applicable only when these gains exceed the prescribed exemption limit.

Official reference:
Income Tax Department – Capital Gains:https://www.incometax.gov.in/iec/foportal/help/individual/return-applicable-1

Current Tax Rate on Equity LTCG

At present:

● LTCG on equity mutual funds is subject to a 12.5% tax rate (without indexation) if the total long-term capital gains exceed the ₹1.25 lakh exemption limit.

● Only gains beyond the exemption limit are subject to this. 

When LTCG Applies to Mutual Fund Investors

LTCG tax applies when:

● Equity mutual fund units are sold after 12 months

● Total annual LTCG crosses the exemption threshold

● Applies to SIPs, lump-sum investments, and switch transactions (unit-wise holding period)

What Is the Current LTCG Exemption Limit?

Existing LTCG Exemption Limit on Equity Investments

For equity shares and equity-oriented mutual funds, the current LTCG exemption limit is ₹1.25 lakh each fiscal year.

A 12.5% tax applies to any LTCG beyond this limit.

How the ₹1.25 Lakh LTCG Exemption Works

Example:

● Total LTCG from equities mutual funds: ₹2,00,000

● Exempt LTCG: ₹1,25,000

● Taxable LTCG: ₹75,000

● Tax due: 12.5% of ₹75,000 = ₹9,375 (plus cess)

This structure rewards long-term investments, but tax-free compounding is restricted.  

Impact of the Current LTCG Exemption Limit on Investors

In practice:

● Long-term SIP investors often breach the exemption limit

● Frequent rebalancing becomes tax-inefficient

● Senior citizens relying on mutual fund withdrawals face higher post-tax impact

What Is the LTCG Exemption Wishlist for Budget 2026?

Why investors think the LTCG exemption will grow

Because of strong reasons, people want it:

● The value of ₹1.25 lakh has gone down because of rising prices

● The value of ₹1.25 lakh has gone down because of rising prices

● The government encourages people to save money and spend it for the long run.

Groups in the industry, such as AMFI, have frequently pointed out this gap.

Will the Budget Increase LTCG Exemption to ₹2 Lakh?

● A ₹2 lakh LTCG exemption limit would align better with today’s income levels

● This would lead to longer waiting times.

● It might make short-term profit booking less likely before the end of the financial year.

In the past, tax changes have usually been made slowly. This makes a rise possible, but not certain.

How Inflation and Market Growth Support This Expectation

● The number of small investors has risen sharply.

● Returns that take inflation into account are smaller than stated gains

This makes the case for reviewing exemption limits stronger.

How an Increased LTCG Exemption Could Impact Mutual Fund Investors

Tax Savings for Long-Term Equity Investors

If the tax break goes up to 2 lakh rupees:

● More gains are still not taxed.

● Higher real CAGR after taxes

● Less pressure to gather gains every year

This is especially good for long-term owners who are careful.

Effect on SIP and Lump Sum Mutual Fund Investments

For SIP investors:

● Each payment is charged separately.

● Higher immunity lets payments go more smoothly.

● Not as much planning is needed for withdrawals.

For buyers with a big sum:

● Profit booking with more freedom

● Better long-term growth of wealth 

What Will Happen to After-Tax Returns If the LTCG tax exemption is raised?

When you plan for the long term, tax policy is very important because even a small increase of 0.5 to 1% in after-tax gains can make your investment sum worth a lot more after 10 to 15 years. 

LTCG Exemption for Senior Citizens: What Could Change?

Current LTCG Rules for Senior Citizens

Currently:

● At the moment, there is no special LTCG provision for seniors.

● All age groups are limited to ₹1.25 lakh.

● Makes things hard for retirees who count on stock funds for income

Why LTCG for Senior Citizens May Need Special Relief

Senior citizens:

● Have lower risk-taking ability

● Many times count on regular withdrawals

● Face few options for beating inflation

Separate or better LTCG aid could help people stay retired longer.

Possible Budget 2026 Measures for Senior Citizen Investors

Potential expectations include:

● More LTCG exemption for older people

● Lower the LTCG tax rate after the break

● Special treatment for payments from mutual funds made for retirement 

How Mutual Fund Strategies May Change If LTCG Exemption Increases

Shift Towards Long-Term Equity Mutual Funds

Higher exemption could:

● Lead to longer holding times

● Lessen churn

● Encourage real, long-term wealth building

Rebalancing the portfolio based on the limits on LTCG exemptions

Investors may:

● Plan their transfers around tax limits

● Rebalancing once a year without tax drag

● Improve your gains more effectively

Impact on ELSS and Other Equity Fund Categories

ELSS already gives tax breaks under Section 80C, but a bigger LTCG exemption could: Make post-lock-in profits better:

● Improve post-lock-in returns

● Make non-ELSS stock funds more appealing as well. 

What Has the Government Done in Past Budgets on LTCG?

Historical Changes to LTCG Exemption Limits

1. Pre-2018: LTCG on equity was exempt

2. Budget 2018: LTCG tax introduced with ₹1 lakh exemption

3. Budget 2024: Exemption raised to ₹1.25 lakh

Budget Trends on Equity Taxation

The pattern suggests:

1. Gradual adjustments, not abrupt changes

2. Balancing revenue needs with investor sentiment

3. Continued encouragement for long-term investing

What These Trends Signal for Budget 2026

Instead of a radical change, a modest increase seems in line with previous policy actions.

Ending Note

People want the LTCG exemption limit to be raised to 2 lakh because they need to plan their money for the long term, spend more, and get used to how things have changed for Indian investors. Investors can better plan for the future now that they know about the rules for LTCG, even though Budget 2026 is not yet set in stone.Even if the policy changes, platforms like Jainam Broking help buyers keep track of their earnings, choose the best times to sell, and set up their mutual fund accounts in the best way possible.