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.
| Tax Component |
Previous Rate |
Current Rate |
Impact |
| STT on Options Sale |
0.06% of premium |
0.10% of premium |
60% increase |
| STT on Futures |
0.01% of traded value |
0.02% of traded value |
60% increase |
| Long-term Capital Gains |
10.00% |
12.50% |
25% increase |
| Short-term Capital Gains |
15.00% |
20.00% |
33% increase |
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.
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