Summary of this article
No major rate cuts expected: Capital gains tax rates may remain unchanged as the government prioritises revenue stability amid global uncertainty.
Clarity on Section 54F exemptions: Amendments may address genuine construction delays in under-construction properties beyond taxpayers’ control.
Fast-track demergers in focus: Tax neutrality for RD-approved demergers could be aligned with NCLT-approved restructurings to reduce friction for MSMEs.
As the government prepares to present the Union Budget 2026 amid global uncertainty and a recently introduced Income-Tax Act, expectations around capital gains taxation are centred more on clarity and course correction than sweeping reforms. With investors closely tracking potential relief for small taxpayers, alignment issues in corporate restructurings, and long-standing ambiguities in reinvestment exemptions under Sections 54 and 54F, the upcoming Budget is seen as an opportunity to address practical pain points without disrupting revenue stability.
Tax experts believe targeted clarifications - rather than rate changes - could define the government’s approach to capital gains in the coming fiscal year.
“This budget comes at a point where the government is clearly trying to keep things steady rather than introduce big surprises. One important backdrop is the new Income-Tax Act, 2026, which has been brought in largely to simplify the language of the existing law and reduce long-standing interpretational issues. Given the scale of this change, I expect the government to allow the new legislation some time to settle in. While minor course corrections are always possible, sweeping structural changes immediately after introducing a new code seem unlikely,” says Vishwas Panjiar, Founder, SVAS Business Advisors.
Capital gains taxation, however, remains an area investors are watching closely. Long-term capital gains on equities are currently taxed at 12.5 per cent beyond Rs 1.25 lakh. “From a practical standpoint, I do not see the rate itself being reduced in the near term. With economic growth facing some pressure and global uncertainty continuing, the government is heavily reliant on stable tax revenues,” adds Panjiar.
There is, however, a reasonable possibility of extending the Section 87A rebate to long-term capital gains in the Budget 2026. Such relief would allow small retail investors to retain a larger portion of their earnings, make equity investments more attractive and equitable, and align with the broader objective of encouraging long-term participation in equity markets.
According to tax experts, one of the most-widely discussed capital gains controversies this year relates to the interpretation of the reinvestment exemption under Section 54F of the Income-Tax Act, 1961. The case involved a taxpayer who sold a parcel of land and claimed an exemption under section 54F by reinvesting the net consideration in a residential property under construction.
“In accordance with section 54F, exemption is available where the taxpayer purchases a residential house within one year before or two years after the date of transfer, or constructs a residential house within three years from the date of transfer of the original asset. In the present case, the taxpayer made payments to the builder within the prescribed timelines. However, due to delays attributable to the builder, the construction was not completed within three years, and the registered deed of conveyance was executed nearly five years after the sale of the original land,” says Neeraj Agarwala, Partner, Nangia & Co LLP.
Despite the fact that the delay was entirely beyond the control of the taxpayer, the exemption under section 54F was denied by the tax department on the ground that the statutory time limit for construction had not been met. The tax authorities adopted a strict and literal interpretation of the provision, focusing solely on the completion timeline.
“This ruling has resonated strongly with individual taxpayers, particularly those investing in under-construction properties, as such delays are common in real estate projects. In the context of the forthcoming Budget, it is widely expected that the Finance Ministry may consider issuing a clarificatory amendment to address such situations,” observes Agarwala.
With the advent of RERA, construction delays are now formally documented and traceable. Recognising genuine delays beyond the taxpayer’s control could bring much-needed certainty and fairness to the application of section 54F, while still preserving the integrity of the exemption framework.
Another issue that needs attention is the tax treatment of fast-track demergers. Demergers approved by the Regional Director under Section 233 are commercially no different from NCLT-approved demergers, yet they risk losing tax-neutral status due to procedural distinctions.
“This creates avoidable friction, especially for MSMEs and group restructurings. A clearer alignment in the tax law, supported by appropriate RD-level scrutiny, would be a far more practical solution,” suggests Panjiar.
