Ahead of Budget 2027, debate has reopened on long-term capital gains tax across asset classes. Listed equity and equity mutual funds attract 12.5% LTCG above ₹1.25 lakh, with a one-year holding period. Debt mutual funds and gold are taxed at 12.5% after two years. Immovable property draws 12.5% LTCG without indexation after two years. Each asset class carries a distinct holding period threshold, tax rate, and exemption limit under the current Income Tax Act framework.

Long-term capital gains tax (LTCG) is levied on profits from selling capital assets held beyond a specified period. The key policy design choices are: the holding period that qualifies gains as 'long-term,' the applicable tax rate, and whether indexation (inflation adjustment on cost) is allowed.

Budget 2024 rationalised LTCG rates sharply. Before it, equity LTCG above ₹1 lakh was taxed at 10%; that exemption threshold was raised to ₹1.25 lakh and the rate to 12.5%, while the indexation benefit on property was withdrawn. This made the tax treatment of property more punishing in real terms — a politically sensitive change that feeds the Budget 2027 debate.

For exam purposes, the transmission mechanism matters: LTCG design affects asset allocation decisions of households, which in turn affects capital formation, equity market depth, and real estate demand. A higher LTCG on equities relative to property can shift savings away from productive financial assets. Conversely, removing indexation from property raises the effective tax burden on long-held assets even if the nominal rate looks low.

SEBI and RBI both track capital market flows and credit demand; changes in LTCG can shift household savings between bank deposits, mutual funds, and real estate — directly affecting credit offtake and monetary transmission. UPSC tests the fiscal policy dimension: how LTCG fits within capital gains tax architecture and its equity vs. efficiency trade-offs.