For equity investors, returns today depend less on market movements and more on what remains after taxes and transaction costs. With capital gains tax and securities transaction tax (STT) steadily rising, the math of equity investing has become tighter. As the Union Budget 2026 approaches, investors are watching closely to see whether the government addresses these cumulative costs or maintains the current tax framework.
Rising STT and Capital Gains Taxes Squeeze Returns
The sharpest impact on investor returns has come from the doubling of STT announced in the previous Budget. STT on options trades was increased from 0.0625 percent to 0.1 percent of the option premium, while futures trades saw a hike from 0.0125 percent to 0.02 percent of the traded value.
At the same time, long-term capital gains (LTCG) tax on equities was raised from 10 percent to 12.5 percent, and short-term capital gains (STCG) tax increased from 15 percent to 20 percent. According to brokerages and mutual fund houses, the higher tax burden has reduced the relative appeal of market-linked investment products, especially for retail investors.
STT Under Growing Scrutiny
Investor discomfort is most pronounced around STT. Introduced in 2004, when equity LTCG was exempt, STT was designed as a low-rate, easy-to-collect tax that could replace capital gains tax while also aiding transaction tracking. Two decades later, its relevance is increasingly being questioned.
“STT has outlived its original purpose as a simple transaction tax,” said a tax expert. He pointed out that modern compliance mechanisms, such as mandatory dematerialisation, exchange-level reporting, and the Annual Information Statement (AIS), have significantly reduced the need for STT as a monitoring tool.
Retail Investors Feel the Arithmetic Pinch
For retail investors, the concern is practical rather than ideological. Multiple layers of costs—STT, capital gains tax, and brokerage—directly reduce post-tax 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 participants,” another tax expert said. He added that reducing LTCG tax to 5 percent for long-term holdings could substantially improve the attractiveness of equity markets for domestic savers.
Legal and Structural Concerns Around STT
The STT debate has also entered the legal arena. According to another tax expert, the levy is currently under constitutional challenge before the Supreme Court. The case raises concerns about double taxation following the reintroduction of LTCG, as well as the fact that STT is charged on transaction value rather than actual profits.
Beyond legal questions, there are broader market-structure implications. While India’s retail investor base has expanded beyond major cities, participation remains uneven.
“Even marginal improvements in post-tax returns can compound meaningfully over long investment horizons,” a tax expert noted. However, frequent changes to capital gains tax rules can discourage first-time investors who have limited tax-planning flexibility.
Higher Transaction Costs Impact Derivatives Trading
Transaction costs are also influencing behaviour in derivatives markets. Rahul Jain, Partner at Khaitan & Co, said the higher STT has increased execution costs across trading strategies.
“The increase in STT rates escalates trading costs and affects high-frequency as well as short-term participation,” he said. Jain added that any reduction in the overall tax burden could help revive investor sentiment amid volatile global markets and continued foreign investor selling.
Conclusion: Equity Investors’ Expectations
As Budget 2026 takes shape, equity investors are not seeking sweeping tax concessions. Their demand is more measured: fewer overlapping taxes, lower frictional costs, and a stable tax regime that rewards long-term investing rather than frequent trading.
Source: MoneyControl