By Rajesh H. Gandhi, Partner, Deloitte India
India today stands as the world’s 4th largest economy, growing at an estimated 6.5–7% annually, even amid global uncertainty. Indian capital markets have expanded rapidly, marked by record demat additions, rising SIP inflows, and deeper retail participation including large investments flowing from domestic institutional investors. For millions of households, investing is no longer speculative but essential for wealth creation, retirement, and inflation protection. In this context, long-term capital gains taxation has become a key consideration with investors seeking fairness, simplicity, and inflation realism.
As India’s equity markets deepen and retail participation expands, Budget 2026 has the chance to revisit the high cost of transacting on Indian stock exchanges. Investors today bear multiple statutory and regulatory charges such as Securities Transaction Tax (‘STT’), brokerage, GST, stamp duty, exchange transaction charges, etc. making India one of the most expensive markets globally in terms of transaction costs.
Why Securities Transaction Tax (‘STT’) needs a rethink
A key expectation from Budget 2026 is the rationalisation of STT, which continues to account for a significant portion of trading costs in equities and derivatives. STT was introduced in 2004 to offset revenue loss from exemption of long-term capital gains on equities and concessional short-term capital gains tax rates. However, the reintroduction of long-term capital gains tax in 2018, without any relief in STT, has resulted in multiple taxation – STT on transaction value and capital gains tax on income from the same trade.
From an income-tax perspective, STT is levied even when transactions result in losses and is also not allowed as a deductible expense while computing capital gains, inflating the effective tax burden. Allowing STT as a deductible expense is therefore a key investor expectation.
Budget 2026 could consider reducing or abolishing STT, particularly for delivery-based trades, to help lower transaction costs and encourage long-term participation in the equity markets. Alternatively, the capital gains tax rates may be lowered back to 10%/15% specially for small investors.
Additionally, there is a growing emphasis on revisiting the annual long-term capital gains exemption threshold on listed equity shares, units of equity oriented mutual funds / business trusts (where STT is paid) which currently stands at ₹1.25 lakh. An upward revision could offer meaningful relief to small and retail investors, reduce the tax impact on modest long-term gains, and better align the framework with the objective of promoting sustained, long-term participation in equity markets.
Under the current tax framework, indexation benefits are no longer available for debt mutual funds resulting in gains being taxed without adjusting for inflation. Further, capital gains arising from Specified Mutual Funds, Market Linked Debentures, and unlisted bonds and debentures subject to specified timelines are taxed as short-term capital assets irrespective of their holding period. This has reduced the tax efficiency of long-term fixed-income investing for households seeking stable, inflation-protected returns. This aspect of capital gains taxation has increasingly drawn attention in discussions around long-term debt investments, particularly in the context of aligning tax outcomes with investment horizons.
Tax hurdle for retail investors
Retail investors and households with mixed portfolios across equities, debt investments and property often face challenges in utilising investment losses due to long-term and short-term capital gain rules. As per the current tax law, any long-term capital losses can be set off only against long-term capital gains and not against short-term capital gains. Genuine economic losses frequently remain unabsorbed, limiting tax efficiency. Budget 2026 may consider introducing broader set-off provisions, allowing long-term capital losses to be adjusted against short-term gains under reasonable safeguards.
Together, these issues highlight the evolving nature of India’s investor base and the need for capital gains taxation to keep pace with market realities and global trends. As household participation across equities, debt and other assets deepens, greater clarity, consistency and alignment with long-term investment behaviour assume importance. Steps such as rationalising STT, allowing long-term capital losses to be set-off against short-term gains, and increasing the exemption limit for long-term capital gains, could help reduce transaction costs, improve post-tax returns and encourage greater participation in capital markets.
Disclaimer: The views expressed are the author’s own and do not reflect the official policy or position of Financial Express.