Ahead of the Union Budget for 2026-27, scheduled to be presented by Finance Minister Nirmala Sitharaman on February 1, market participants in India are actively advocating for significant capital market tax reforms. A primary demand is to increase the tax-free exemption limit on long-term capital gains (LTCG) from equity investments, with recommendations to raise it from the current ₹1.25 lakh to ₹2 lakh. This move is expected to provide greater relief to retail and long-term investors, encouraging more participation in the equity markets. Additionally, stakeholders are pushing for the standardization of the "long term" definition to 12 months across all asset classes, including equity, debt, gold, and real estate, to reduce complexity and improve tax clarity. There are also calls for allowing capital losses to be set off against income under other heads, offering more flexibility to investors. Importantly, market participants have cautioned the government against any further increases in transaction-related taxes, such as the Securities Transaction Tax (STT). This comes amidst reports that STT collections are likely to miss budget targets, partly due to regulatory tightening in Futures and Options (F&O) trading. Some experts even suggest reducing both long-term and short-term capital gains tax to 10% to significantly boost retail investor participation. The push for these reforms is also contextualized by significant foreign institutional investor (FII) outflows from Indian markets, totaling $21 billion since early 2025. Morgan Stanley has identified three key capital market reforms, including simplifying buyback taxation and enhancing GIFT City's tax incentives, that could help reverse this trend. The consensus among industry experts highlights the need for a stable and predictable tax environment to build long-term investor confidence and foster sustainable growth in India's capital markets.