New regime narrows LTCG-regular income tax gap. Are equities still worth it?

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Subscribe to enjoy similar stories. MUMBAI : 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.

This makes it useful to structure passive income as LTCG from equity or equity mutual funds, especially for those retiring or taking a career break. However, the scenario has changed with the new tax structure introduced in budget 2025. The average tax rate (effective tax rate) for someone earning ₹24 lakh annually has come down to 12.5% under the new tax regime.