LTCG Tax Not Being Scrapped 2026 | FPI G-Sec Exemption from April

What Happened?

The Finance Ministry has issued an official clarification stating that the Long-Term Capital Gains (LTCG) tax under the Income Tax Act 2025 will not be repealed or scrapped. This clarification comes after market speculation and investor concerns about potential changes to LTCG taxation. Additionally, the government has confirmed a significant tax exemption for Foreign Portfolio Investors (FPI) investing in Government Securities, which becomes effective from 1 April 2026. The Ministry also reported LTCG tax revenue collections, reinforcing the government's commitment to this taxation mechanism.

Background & Legal Context

The Long-Term Capital Gains tax is governed under Section 112 of the Income Tax Act 2025 (previously Section 112 under the 1961 Act). This section provides concessional taxation on profits earned from the sale of long-term capital assets held for more than 24 months (for listed securities and real estate) or 36 months (for unlisted assets).

Key Points on LTCG Taxation:

• Tax Rate: 20% flat rate on LTCG with indexation benefit (or 10% without indexation for listed securities, subject to conditions)
• Applicability: Applies to individuals, Hindu Undivided Families (HUFs), and other entities holding capital assets for defined holding periods
• Indexation Benefit: The Cost Inflation Index (CII) is applied to reduce the taxable gain, making it a taxpayer-friendly provision
• Surcharge & Cess: Additionally subject to applicable surcharge and Health and Education Cess under Sections 89 and 4 of the IT Act 2025

The new clarification ensures continuity of this taxation framework for Assessment Year (AY) 2026-27 and beyond. The LTCG tax has been a significant revenue source for the government, and its continued implementation reflects fiscal policy stability.

FPI Exemption on Government Securities:

The government has separately notified that Foreign Portfolio Investors will be exempt from tax on income derived from Government Securities effective 1 April 2026. This exemption applies to:

• Central Government Securities (G-Secs)
• State Development Loans (SDLs)
• Interest income and capital gains derived from such securities

This exemption is intended to attract foreign investment into India's debt markets and improve liquidity in government securities. The exemption does not apply to FPI investments in equity or other asset classes.

What Does This Mean for You?

For Indian Residents & Individual Investors:

If you are an individual investor holding long-term capital assets such as stocks, mutual funds, bonds, or real estate, the LTCG tax continues to apply as before. You will not benefit from any exemption announced in this clarification. Your LTCG remains taxable under Section 112 of the Income Tax Act 2025 at 20% with indexation benefit (or 10% for listed securities without indexation, if applicable).

Practical Impact: When you sell your shares held for more than 24 months, you must calculate your gain by subtracting the Cost Inflation Index-adjusted purchase cost from the sale price. At AY 2026-27, you will report this gain in Schedule CG (Capital Gains) of your Income Tax Return.

For Foreign Portfolio Investors (FPI):

If you are an FPI registered with the Securities and Exchange Board of India (SEBI), the new exemption is highly beneficial. From 1 April 2026 onwards:

• All interest income earned from Government Securities will be tax-exempt
• All capital gains (whether short-term or long-term) from Government Securities will be tax-exempt
• You will NOT need to file an income tax return for income derived solely from Government Securities
• However, income from other sources (equities, corporate bonds, etc.) remains taxable

Practical Impact: FPI investors can now allocate more capital to Government Securities without tax burden, improving their net returns on these investments.

For Businesses & Corporate Entities:

Companies holding long-term capital assets continue to be subject to LTCG tax at 20%. However, the clarification provides certainty for tax planning purposes. Companies can confidently structure their investments knowing that LTCG taxation will remain stable in the coming years.

For HUF (Hindu Undivided Families):

HUFs are treated as separate assessees for income tax purposes and must pay LTCG tax on capital gains at 20%. No exemption or change has been announced for HUFs in this clarification.

What Should You Do Now?

Immediate Action Items:

1. Review Your Investment Portfolio: If you hold long-term capital assets, review your holding period to ensure you meet the minimum duration for LTCG treatment (24 months for listed securities, 36 months for unlisted assets).
2. Calculate Expected LTCG Liability: If you plan to sell long-term assets before 31 March 2026, calculate your expected LTCG liability (20% with indexation benefit). Plan your cash flows accordingly.
3. For FPI Investors: If registered as FPI, begin identifying and segregating your Government Securities investments. Prepare separate accounting for G-Sec income to claim exemption from 1 April 2026 onwards.
4. Maintain Proper Records: Maintain clear documentation of:
• Purchase date and cost of acquisition
• Sale date and sale price
• Holding period computation
• Cost Inflation Index (CII) for the year of purchase and sale
5. Update ITR Filing: For AY 2025-26, if you have LTCG income, ensure it is correctly reported in Schedule CG of your ITR-1, ITR-2, or ITR-3 (depending on your category).
6. Tax Planning: Consider the timing of capital asset sales. Selling in different financial years may help optimize your overall tax liability when combined with other income sources.
7. Professional Guidance: Consult a qualified Chartered Accountant to review your specific situation, especially if you have significant capital gains or are an FPI entity.

Key Takeaways

• LTCG Tax is Here to Stay: The Finance Ministry has unequivocally clarified that Long-Term Capital Gains tax under Section 112 of the Income Tax Act 2025 will not be repealed. No policy change is planned.
• FPI Get G-Sec Exemption: Foreign Portfolio Investors will be exempt from tax on income (interest + capital gains) derived from Government Securities effective 1 April 2026, making these investments more attractive.
• Continued 20% Rate: Individual and non-FPI investors continue to pay 20% LTCG tax with indexation benefit. This rate remains unchanged for AY 2026-27 onwards.
• Revenue Importance: The government's clarification that LTCG revenue is being tracked and reported indicates the tax is a key fiscal revenue source, ensuring its continued application.
• Plan Your Timings: Individual investors should strategically time the sale of long-term assets considering the LTCG tax impact, especially if they have significant unrealized gains.

Bottom Line: The clarification provides policy certainty for investors and businesses. LTCG taxation remains a core part of India's income tax system, and FPI investors get a new advantage with Government Securities exemption. Individual investors should continue to account for 20% LTCG tax in their investment planning.

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