Equity Investors Push for Tax Relief in Budget 2026

In a call to the government through Budget 2026, equity investors are asking the government to cut the long-term capital gains tax (LTCG) of 12.5% and repeal any increase in securities transaction taxes (STT) to enhance after-tax returns, due to the increased impact on after-tax profits now heavily outweighs the impact of market movements alone, as per a Moneycontrol report. LTCG taxes have recently increased from 10% to 12.5%, and the short-term capital gains tax has increased from 15% to 20% in last year's budget.

Other law changes involving STT are the increase of STT on options to be 0.1% of the premium price and 0.02% of the value of a future contract from 0.001% for both options and futures.

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Impact on Retail Participation

For retail investors, the increased cost of STT and capital gains erodes the benefits of systematic investment plans (SIPs) they may have enjoyed. The increased cost of STT affects the execution cost on derivative finish transactions for high-frequency and short-term traders. These new taxes will significantly decrease the total amount of money that is returned to retail investors.

The usage of modern technology, like dematerialisation and the provision of annual information statements, is reducing the role of tracking year-over-year growth through STT imposed after the laws changed in 2004. So, investors are pushing to cut LTCG in the Union Budget 2026. 

Legal and Market Structure Issues

Since the return of the Long-Term Capital gains tax, the securities transaction tax has been challenged before the Supreme Court regarding claims of double taxation. Certain critics of the STT contend that it taxes the value of transactions as opposed to profits derived from those transactions. Although the retail base of the STT has grown sufficiently to be outside of major urban centres, there remains an issue of uneven access because of the constant shifting of the legislative environment surrounding taxes, which leads to significant uncertainty for new participants.

Evolution of Tax Framework

When equity long-term capital gains were tax-exempt, the STT provided brokers with a low-tax alternative. Two decades later, with the shrinking of brokerage and mutual fund assets in relation to market-related products, many investors are now searching for a more straightforward tax-neutral product that provides an incentive to invest rather than trade, given the global flows of capital (or foreign selling).

At the same time, the impending federal budget has narrowed the number of issues that will be addressed.