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

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. 

The changing tax structure

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. 

In comparison, after accounting for the ₹1.25 lakh LTCG exemption, the effective tax rate on equity gains is approximately 11.85%. This small difference has significantly reduced the tax appeal of equity investments for many investors.

A Twitter poll conducted by Mint‘s personal finance editor Neil Borate, shows 51% of the respondents spent less than ₹12 lakh per annum and 31% between ₹12 lakh and ₹24 lakh.

This means that nearly 80% of respondents require less than ₹24 lakh a year to meet their lifestyle needs and they stand to benefit the most from the revised tax regime. 

Moreover, investing wisely can enable them to comfortably achieve their FIRE—financial independence, retire early—goal.  

What do experts think?

This shift will likely push a segment of investors away from equity and equity-oriented funds like BAFs, hybrid funds, and arbitrage funds, said Abhishek Kumar, a Sebi-registered investment advisor and co-founder of SahazMoney.

“Now, that the taxation for LTCG and ordinary income below ₹24 lakh is almost at par, it may no longer make sense for investors nearing retirement to opt for equity or equity-oriented funds solely for tax benefits,” he said.

For retirees or those close to retirement, the focus should now shift from chasing high returns to capital preservation and ensuring a predictable income stream. 

Abhishek recommended a “bucket strategy” for such investors. This approach involves dividing investments into separate buckets—one for low-risk debt products to cover near-term expenses and another for long-term growth through equity. “This strategy helps mitigate the short-term volatility risks associated with equity investments while ensuring that immediate financial needs are met safely,” he added.

The new tax regime has also levelled the playing field between debt and equity products, making debt mutual funds and fixed deposits more appealing. For conservative investors with incomes below ₹24 lakh, the comparable tax treatment of ordinary income and capital gains means they can focus on stable, lower-risk investments without missing out on tax efficiency.

Amit Sahita, director at Fincode Advisory Services, cautions investors not to overlook the possibility of lower fixed-income returns during prolonged equity market downturns. “When equity markets struggle, central banks often reduce interest rates to spur growth, which leads to declining returns from fixed-income products.”

The new tax regime calls for a more nuanced approach to financial planning. Investors who allocated money to equity funds earlier only for lower taxes might want to consider allocating more money to debt for regular income. 

For some, equity would continue to offer long-term growth prospects that justify its risks, while others—particularly retirees—might find greater peace of mind in debt-oriented products.