The 30-share Sensex, which remained flat in pre-Budget trading, dropped 245.76 points at 17,578.12. It touched the day's low of 17,258.20 and a high of 17,779.54 points.
National Stock Exchange index Nifty moved between 5,290.80 and 5,098.35 points, before ending at 5,223.50, a loss of 61.60 points.
Marketmen said besides the hike short-term capital gains tax, the other proposal to waive some farm loans also dampened the sentiments.
Finance Minister P Chidambaram in his Budget 2008-09 has proposed an increase in the short-term capital gains tax, or the levy on securities held for less than a year, to 15 per cent from 10 per cent.
Marketmen also said reports of a steep fall in global stock markets also contributed to the markets' fall.