New tax slabs and exemptions: Have equities lost the advantage?

Union Budget 2025-26 has narrowed the tax gap between regular income and long-term capital gains

- Anil Poste

The new slab rates and exemption threshold introduced in the Union Budget 2025-26 under the new tax regime marked the beginning of a new chapter for the Indian middle-class taxpayer.

However, the relaxations have reduced the tax advantages of equity investments for small and medium investors, especially those with annual incomes of up to 24 lakh.

Historically, investors often chose equity investments like arbitrage funds and hybrid funds like balanced advantage funds for their preferential tax treatment compared to regular income.

Until Budget 2024, individuals earning more than ₹10 lakh were taxed at 30% under the old tax regime, which made equity investments very attractive as long-term capital gains (LTCG) were taxed at only 10%.

That said, income up to ₹2.5 lakh is exempt, ₹2.5-5 lakh is taxed at 5%, and 5-10 lakh is taxed at 20%.

Though the effective or average tax rate is lower, the gap versus the LTCG tax is still substantial. The LTCG tax was raised to 12.5% in the 2024 budget.

Arbitrage funds, balanced advantage funds (BAFs), and equity funds offer significant tax savings while providing moderate returns since they are taxed as equity.