Union Budget 2025: Key Capital Gains Tax Changes for Stock Market Investment

The Union Budget 2025 introduced minor changes to the capital gains tax structure, keeping the tax rates and holding periods unchanged. These rules will apply to various assets such as shares, mutual funds, bonds, debentures, unlisted shares, real estate, and other financial instruments for the financial year 2026 (Assessment Year 2026-27). 

Below are the major updates on capital gains taxation:

Tax on Unit Linked Insurance Plans (ULIPs)

Starting April 1, 2026, ULIPs with annual premiums above ₹2.5 lakh will attract a long-term capital gains (LTCG) tax of 12.5%. This change aims to standardise ULIP taxation with equity mutual funds.

Previously, there was confusion about whether ULIP gains should be classified as capital gains or regular income. Unlike traditional insurance policies that mainly invest in debt instruments, ULIPs allocate a large portion to equities. The revised framework now clearly categorises them under LTCG taxation.

LTCG Tax on Foreign Institutional Investors (FIIs)

The LTCG tax rate on certain securities for foreign institutional investors (FIIs) will increase from 10% to 12.5% from April 1, 2026. This change aligns LTCG tax rates for FIIs with those for Indian residents.

Previously, LTCG tax for listed shares, equity mutual funds, and business trusts was increased to 12.5% for FIIs in Budget 2024. However, bonds, government securities, and non-convertible debentures (NCDs) were still taxed at 10%. The new amendment corrects this and ensures uniform taxation.

Taxation of Alternative Investment Funds (AIFs)

Income from Category I and II AIFs will now be considered capital gains and taxed at 12.5%. Earlier, there was no clear tax classification for such income. The updated rule ensures consistency in the taxation of AIFs.

Category I and II AIFs mainly invest in unlisted companies, infrastructure, and debt instruments, while Category III AIFs focus on listed companies. Currently, Category I and II AIFs enjoy pass-through taxation, meaning their investors are taxed directly, whereas Category III AIFs do not receive the same treatment.

If the income of these AIFs were classified as business income, it would attract a much higher tax rate—30% for residents and up to 39% for non-residents. The new amendment, effective April 1, 2026, ensures AIF investors benefit from a lower tax rate.

Conclusion

The Budget 2025 retains the existing capital gains tax structure but introduces adjustments for ULIPs, FIIs, and AIFs. These changes aim to provide clarity and fairness in taxation, impacting investors from April 1, 2026, onwards.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. This does not constitute a personal recommendation/investment advice. It does not aim to influence any individual or entity to make investment decisions. Recipients should conduct their own research and assessments to form an independent opinion about investment decisions.

Investments in the securities market are subject to market risks, read all the related documents carefully before investing.