For equity investors, returns today are shaped less by market direction and more by what remains after taxes and transaction costs are deducted. With capital gains tax and securities transaction tax in play, the arithmetic of investing has become tighter. As the Union Budget 2026 approaches, investors are closely watching to see whether policymakers address these cumulative costs or leave the existing structure unchanged.
The deepest impact seems to be from the doubling of STT, which was announced in the previous Budget. The rates on the sale of options were raised from 0.0625 percent to 0.1 percent of the option premium, while the STT on futures trades was increased from 0.0125 percent to 0.02 percent of the traded value.
Long-term capital gains (LTCG) tax was also raised from 10 percent to 12.5 percent, and short-term capital gains rose from 15 percent to 20 percent. Brokerages and mutual fund houses say the higher tax burden is making market-linked financial products less attractive for investors.
Where investor discomfort is more pronounced is the Securities Transaction Tax (STT). Introduced in 2004 when equity LTCG was exempt, STT was positioned as a simple, low-rate levy that could substitute for capital gains taxation while also helping track securities transactions. Two decades later, its relevance is being questioned.
“Regarding STT, yes, it has outlived its original purpose as a simple transaction tax,” an tax expert said. He said modern reporting tools such as mandatory dematerialisation, exchange-level reporting and the Annual Information Statement (AIS) have narrowed the role STT was meant to play.
For retail investors, the issue is less ideological and more arithmetic. Each layer of cost- STT, capital gains tax, chips away at post-tax returns, particularly for those investing small sums through SIPs.
“The current capital gains tax regime presents a dual challenge for retail investors, particularly those utilising SIPs,” another tax expert said. He added that “a further reduction to 5 percent for long-term holdings would significantly enhance the attractiveness of the Indian capital markets for domestic savers.”
The STT debate has also moved beyond policy circles into the courtroom. Another tax expert said the levy is currently under constitutional scrutiny. “The legal issue regarding the validity of the STT is currently sub-judice and pending before the Supreme Court,” he said, highlighting arguments that the tax results in double taxation now that LTCG has been reintroduced, and that it is imposed on transaction value rather than profits.
Beyond legality, there is a broader market-structure concern. India’s retail base has expanded well beyond large cities, but participation remains uneven.
“Even marginal improvements in post-tax returns compound meaningfully over long holding periods, reinforcing household participation in financial assets,” another tax expert said. Frequent recalibration of capital gains parameters, however, can unsettle first-time investors who lack tax-planning flexibility.
Transaction costs are also shaping behaviour in derivatives markets. Rahul Jain, Partner at Khaitan & Co, said higher STT has raised the cost of execution across strategies. “The increase in STT rates certainly escalates the trading cost and impacts high-frequency trades as well as short-term participation in the market,” he said, adding that any reduction in overall tax cost could help revive sentiment amid volatile global flows and sustained foreign investor selling.
As Budget 2026 takes shape, equity investors are not pushing for sweeping concessions. Their ask is more restrained: fewer moving parts, lower friction, and a tax framework that rewards staying invested rather than merely transacting.
