Different capital assets — such as listed shares, mutual funds, tax-free bonds, debentures, unlisted shares, and real estate — are taxed based on how long they are held. This determines whether the gains are classified as LTCG or STCG.
Finance Minister Nirmala Sitharaman made minor tweaks to the capital gains tax system in Budget 2025, following a major overhaul in the July 2024 Budget.
The tax rates and holding periods for different assets remain unchanged, meaning the rules for long-term capital gains (LTCG) and short-term capital gains (STCG) will continue for the financial year 2026 (Assessment Year 2026-27).
Different capital assets — such as listed shares, mutual funds, tax-free bonds, debentures, unlisted shares, and real estate — are taxed based on how long they are held. This determines whether the gains are classified as LTCG or STCG.
Unit Linked Insurance Plans (ULIPs)
From April 1, 2026, Unit Linked Insurance Plans (ULIPs) with annual premiums above Rs 2.5 lakh will be taxed at a 12.5% long-term capital gains (LTCG) rate. This change aims to bring more clarity to the taxation of ULIPs, which combine insurance with stock market investments.
Earlier, there was confusion about whether long-term gains (held for over a year) on ULIPs should be taxed as LTCG or treated as income from other sources. The tax treatment of ULIP gains, especially for high-premium policies, was also unclear. Unlike traditional insurance plans that invest mainly in debt, ULIPs put a significant part of the premium into stocks. This made it necessary to tax them differently from regular insurance policies.
The FM announced that ULIPs with annual premiums over Rs 2.5 lakh will now be taxed like equity mutual funds. This change builds on the 2021 budget, which first introduced taxes on high-premium ULIP returns. However, uncertainty remained about how these policies would be taxed when redeemed, leading to investor confusion.
The Finance Bill 2025 clarifies this by stating that any amount received from such ULIPs, where the Section 10(10D) exemption does not apply, will be taxed as capital gains. This rule will take effect from April 1, 2026, impacting the assessment year 2026-27 onwards.
LTCG Tax Hike: FIIs and Specified Funds to Pay 12.5% from April 2026
The Finance Bill 2025 proposes raising the long-term capital gains (LTCG) tax rate on certain securities from 10% to 12.5%, effective April 1, 2026. This follows last year’s increase to 12.5% for listed shares, equity mutual funds, and business trust units sold by foreign institutional investors (FIIs).
For specified funds and FIIs, LTCG tax rates under section 112A have been aligned with those for residents. However, for long-term gains not covered under section 112A, the tax rate remains 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 April 1, 2026, and shall accordingly, apply in relation to the assessment year 2026-27 and subsequent assessment years,” it said.
In 2024, foreign institutional investors (FIIs) invested only Rs 1,600 crore in the Indian stock market on a net basis, a sharp 99% drop from Rs 1.71 lakh crore in the previous year.
FIIs started the year strong, buying Rs 1.12 lakh crore worth of Indian stocks in the first nine months. However, from October 2024 onwards, they sold stocks worth over Rs 2.63 lakh crore due to an economic slowdown and weaker corporate earnings.
Last year, when the LTCG tax rates were changed for residents, the tax rate for FPIs on shares, equity mutual funds, and business trusts was set at 12.5%. However, LTCG on other assets like government securities (G-secs), bonds, and NCDs remained at 10%, possibly by mistake.
AIFs to Face 12.5% Capital Gains Tax from April 2026
Income earned by Category I and II Alternative Investment Funds (AIFs) will now be taxed as capital gains at a 12.5% rate. Previously, there was no clear rule on how this income was taxed. The definition of “capital asset” under the Income Tax Act has been expanded to include gains made by AIFs.
If this income were treated as business income instead, it would attract a much higher tax—30% for residents and up to 39% for non-residents. Category I and II AIFs mainly invest in unlisted companies, debt instruments, and infrastructure, while Category III AIFs focus on listed stocks.
Currently, Category I and II AIFs enjoy pass-through taxation, meaning tax is levied at the investor level, not the fund level. However, Category III AIFs do not get this benefit. This new tax rule will take effect from April 1, 2026, for the assessment year 2026-27.
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This blog is purely for educational purposes. Mutual fund investments are subject to market risks, read all scheme-related documents carefully.
