Budget 2026-27: The hidden tax burden on small equity investors

January 24, 2026 Finance Talk Valli Sarvani

Earning under ₹12 lakh no longer guarantees a zero-tax outcome if part of that income comes from long-term investments.

As discussions around the Union Budget 2026-27 gain momentum, tax experts are highlighting gaps in the current framework that continue to affect middle-class investors, particularly those investing in equity mutual funds.

Under the revised tax structure announced in Budget 2025, individuals earning up to ₹12 lakh under the new tax regime are eligible for a ₹60,000 rebate under Section 87A.

This rebate effectively wipes out their tax liability. However, the relief does not apply to income taxed at special rates, such as long-term capital gains (LTCG) and short-term capital gains.

As a result, taxpayers with equity-linked investments can still face a tax bill despite staying within the so-called zero-tax income limit.

This distinction has drawn strong reactions from tax professionals and the Association of Mutual Funds in India (AMFI).

They argue that excluding capital gains from the Section 87A rebate penalises disciplined investors who rely on mutual funds for long-term wealth creation.

AMFI has formally requested that the rebate be allowed after calculating tax on special-rate incomes, as long as total income, including capital gains, does not exceed ₹12 lakh.

The concern is intensified by the existing LTCG exemption threshold. In Budget 2024, the government raised the exemption limit to ₹1.25 lakh and increased the LTCG tax rate to 12.5%.

While the move offered some relief, experts believe the threshold remains inadequate for long-term investors.

They point out that the limit has not been meaningfully adjusted for inflation or rising investment values over time.

For many middle-class taxpayers, equity mutual funds are redeemed during critical life events. In such cases, capital gains often exceed ₹1.25 lakh, triggering tax even when overall income remains modest.

Experts warn that this outcome contradicts the government’s objective of promoting savings and investment.

Illustrations shared by tax advisors show that two individuals with identical incomes can face different tax outcomes solely based on whether they earned capital gains.

This inconsistency has strengthened calls for reform ahead of Budget 2026–27.

Tax experts now expect the government to either extend the Section 87A rebate to cover capital gains or raise and index-link the LTCG exemption limit.

Such measures, they say, would align tax policy with fairness, inflation realities, and long-term investment goals for India’s middle class.

Image from Pxhere (Free for commercial use / CC0 Public Domain)

Image Published on February 21, 2017