Union Budget 2026: Equity investors seek lower LTCG, STT to ease tax drag on returns
Equity investors want stability and lower transaction costs as taxes increasingly erode post-tax returns
As the Union Budget 2026 approaches, equity investors are calling for a rationalisation of capital gains tax and securities transaction tax (STT), arguing that rising levies are steadily eating into post-tax returns and discouraging long-term participation in markets.
For investors, returns are now shaped not just by market performance but by what remains after capital gains tax and transaction costs are deducted. The cumulative impact of higher long-term capital gains (LTCG) tax and increased STT has tightened the arithmetic of investing, particularly for retail participants.
The pressure has intensified since last year’s Budget, which doubled STT rates across key derivatives segments. STT on options sales was raised from 0.0625 percent to 0.1 percent of the option premium, while futures trades saw the levy increase from 0.0125 percent to 0.02 percent of traded value. At the same time, LTCG tax was increased from 10 percent to 12.5 percent, and short-term capital gains tax from 15 percent to 20 percent.
Brokerages and mutual fund houses say these changes have reduced the appeal of market-linked products, especially for long-term savers.
Investor discomfort is most visible around STT, a levy introduced in 2004 when long-term capital gains on equities were exempt. Originally designed as a simple transaction tax to substitute for capital gains taxation and improve compliance, its relevance is now being questioned.
“STT has outlived its original purpose as a simple transaction tax,” said Kunal Savani, Partner at Cyril Amarchand Mangaldas, pointing out that modern reporting systems such as mandatory dematerialisation, exchange-level reporting and the Annual Information Statement (AIS) have significantly reduced the need for such a levy.
For retail investors, the issue is practical rather than philosophical. Each additional layer of cost—STT and capital gains tax—reduces net returns, particularly for those investing small amounts through systematic investment plans (SIPs).
“The current capital gains tax regime presents a dual challenge for retail investors, especially SIP investors,” said Ankit Jain, Partner at Ved Jain and Associates. He added that reducing LTCG tax to 5 percent for long-term holdings could materially improve the attractiveness of equity markets for domestic savers.
The debate around STT has also entered the legal arena. Rohit Jain, Managing Partner at Singhania & Co, said the levy is currently under constitutional scrutiny before the Supreme Court. Arguments include claims of double taxation following the reintroduction of LTCG and concerns that STT is imposed on transaction value rather than actual profits.
Beyond tax policy, market participants are worried about broader structural implications. While India’s retail investor base has expanded beyond major cities, participation remains uneven and sensitive to changes in post-tax returns.
“Even marginal improvements in post-tax returns can compound meaningfully over long holding periods and strengthen household participation in financial assets,” said Vanita Salian Bangera, Head of Institutional Sales Trading at Aikyam Capital Group. She added that frequent changes to capital gains rules can unsettle first-time investors who have limited tax-planning flexibility.
Higher transaction costs are also affecting derivatives trading strategies. Rahul Jain, Partner at Khaitan & Co, said the increased STT has raised execution costs across the board. “The higher rates impact high-frequency trades as well as short-term market participation,” he said, adding that easing the overall tax burden could help revive sentiment amid volatile global flows and persistent foreign investor selling.
As policymakers finalise Budget 2026, equity investors are not seeking sweeping tax concessions. Instead, their demand is modest and focused: lower friction, fewer frequent changes, and a tax framework that rewards long-term investment rather than penalising participation through higher transaction costs.
