Equity investors are closely monitoring the Union Budget 2026, hoping for relief from higher transaction costs and capital gains taxes that have tightened investment returns. The focus centers on reducing the securities transaction tax (STT) and long-term capital gains (LTCG) tax rates that were increased in the previous budget.

Impact of Recent Tax Changes

The previous budget significantly increased transaction costs for equity investors through higher STT rates and capital gains taxes. The changes have made market-linked financial products less attractive according to brokerages and mutual fund houses.

Questioning STT's Relevance

Market experts are challenging the continued relevance of STT, which was introduced in 2004 when equity LTCG was exempt. "Regarding STT, yes, it has outlived its original purpose as a simple transaction tax," said Kunal Savani, Partner at Cyril Amarchand Mangaldas. Modern reporting mechanisms have reduced STT's original tracking function:

• Mandatory dematerialisation of securities
• Exchange-level reporting systems
• Annual Information Statement (AIS) requirements

Legal Challenges and Constitutional Scrutiny

The STT debate has moved beyond policy discussions into legal territory. "The legal issue regarding the validity of the STT is currently sub-judice and pending before the Supreme Court," said Rohit Jain, Managing Partner at Singhania & Co. The constitutional challenges focus on:

• Potential double taxation concerns with LTCG reintroduction
• Tax imposition on transaction value rather than profits
• Questions about the levy's legal foundation

Impact on Retail Investors

For retail investors, particularly those using systematic investment plans (SIPs), the cumulative effect of multiple tax layers significantly impacts returns. "The current capital gains tax regime presents a dual challenge for retail investors, particularly those utilising SIPs," said Ankit Jain, Partner at Ved Jain and Associates. He suggested that "a further reduction to 5.00% for long-term holdings would significantly enhance the attractiveness of the Indian capital markets for domestic savers."

Market Structure Concerns

The higher transaction costs are affecting market participation and trading behavior. "The increase in STT rates certainly escalates the trading cost and impacts high-frequency trades as well as short-term participation in the market," said Rahul Jain, Partner at Khaitan & Co. Market participants note that even marginal improvements in post-tax returns can compound meaningfully over long holding periods, reinforcing household participation in financial assets.

Investor Expectations for Budget 2026

As Budget 2026 approaches, equity investors are seeking measured reforms rather than sweeping changes. Their primary demands include:

• Reduced friction in the tax framework
• Fewer moving parts in capital gains taxation
• Incentives that reward long-term investment over frequent transactions
• Lower overall transaction costs to improve market sentiment

The investment community hopes policymakers will address these cumulative costs to maintain the attractiveness of India's capital markets for domestic savers and encourage broader retail participation across the country.

States have raised significant concerns about deteriorating fiscal conditions and mounting revenue pressures during a pre-Budget consultation meeting with Finance Minister Nirmala Sitharaman. The meeting, attended by finance ministers and senior representatives from several states and Union Territories, highlighted the financial challenges facing state governments ahead of the Union Budget 2026-27.

GST Rate Cuts Impact State Revenues

States flagged that mid-year GST rate cuts have led to substantial revenue losses, creating budgetary constraints despite the measures being described as pro-people. The GST rationalisation, while benefiting consumers, has significantly impacted state finances and limited their fiscal room for spending on essential programs and development initiatives.

Compensation and Revenue Sharing Demands

Several states sought compensation or a share in new cess or excise revenues to offset the revenue shortfall. Particular emphasis was placed on products such as tobacco and paan masala, with states arguing that such levies contribute meaningfully to overall collections but provide limited direct relief to state revenues under the current framework.

States highlighted the disconnect between central revenue collection and state-level benefits, urging for a more equitable distribution mechanism that would help address their fiscal constraints.

Centre-State Funding Structure Concerns

States called for a fairer Centre-State funding structure for centrally sponsored schemes, pointing to the pressure created by existing cost-sharing arrangements. The current framework was described as placing undue burden on state finances, particularly given their already constrained fiscal position.

Demands were raised for:

• Higher capital expenditure support from the Centre
• Greater clarity on long-term funding commitments
• Better planning and execution capabilities through improved funding mechanisms

Budget 2026-27 Timeline

Finance Minister Sitharaman will present the Union Budget 2026-27 on February 1, 2026, marking an unusual occurrence as it will be presented on a Sunday for the first time in decades. The Economic Survey is scheduled to be tabled on January 20, ahead of the budget presentation.

The budget session has received approval from President Droupadi Murmu on the Union government's recommendation, with Kiren Rijiju announcing the session details on social media platform 'X'.

The concerns raised by states during the pre-Budget consultation underscore the complex fiscal challenges facing both central and state governments, with states urging that their fiscal constraints be factored into upcoming Budget decisions.