For equity investors, market direction alone no longer determines outcomes. What ultimately matters is the return left after accounting for capital gains tax and transaction-related levies. With both capital gains tax and Securities Transaction Tax (STT) in force, investing has become a game of fine margins.
As the Union Budget 2026 approaches, investors are keen to see whether the government eases this burden or continues with the existing tax structure. A major source of concern is the sharp hike in STT announced in the last Budget. The tax on options sales was increased from 0.0625 per cent to 0.1 per cent of the option premium, while STT on futures trades rose from 0.0125 per cent to 0.02 per cent of the transaction value. Though these changes appear incremental, they have significantly increased trading costs, particularly for active and derivative market participants.
Capital gains taxation has also tightened. Long-term capital gains (LTCG) tax on equities was raised from 10 per cent to 12.5 per cent, while short-term capital gains jumped from 15 per cent to 20 per cent. Market intermediaries say the cumulative impact of higher capital gains tax and STT is reducing the appeal of equity-oriented financial products for both new and existing investors.
The sharpest criticism, however, is directed at STT. Introduced in 2004, when equity LTCG was fully exempt, STT was meant to be a low-rate, easy-to-collect levy that also helped authorities track securities transactions. Nearly twenty years later, with capital gains tax firmly reinstated and digital reporting systems firmly in place, the relevance of STT is being increasingly questioned.
"STT has largely lost its original justification," a tax expert observed, noting that mechanisms such as mandatory demat accounts, exchange reporting systems and the Annual Information Statement (AIS) already provide comprehensive transaction visibility to tax authorities.
For retail investors, the issue is a matter of numbers rather than policy philosophy. Each additional cost-STT, brokerage charges and capital gains tax-reduces the final take-home return. This effect is particularly pronounced for small investors using systematic investment plans (SIPs), where even modest levies can materially affect long-term outcomes.
"The present capital gains framework creates a double disadvantage for retail investors, especially SIP participants," another tax expert said. He suggested that lowering LTCG tax to 5 per cent for long-term equity holdings could significantly improve the attractiveness of equities for household savers.
STT has also become a subject of legal debate. According to experts, the levy is currently under consideration before the Supreme Court. The challenge centres on whether STT amounts to double taxation after the reintroduction of LTCG tax, and whether taxing transaction value rather than actual profits is constitutionally valid.
Beyond legal and fiscal arguments, there are wider concerns about market participation. While India's retail investor base has expanded rapidly across smaller cities and towns, sustained participation depends heavily on post-tax returns. Experts state that even small tax savings can compound significantly over long investment horizons, encouraging greater household exposure to financial assets. Conversely, frequent changes to tax rules risk discouraging first-time investors who lack the ability to adjust their strategies quickly. Higher transaction costs are also influencing behaviour in the derivatives segment.
As Budget 2026 draws nearer, equity investors are not demanding sweeping tax cuts. Their expectations are more modest: a stable and predictable tax regime, lower frictional costs and policies that reward long-term investing rather than frequent trading.
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