INDIA'S TWIN TAX BURDEN

 

BIZ MASALA  |  BUSINESS • MARKETS • PEOPLE • INSIGHT

Can a review of STT and capital-gains tax bring investors back—or is the problem bigger  than tax?

By Murthy ASR  |  Biz Masala  |  October 2026

THE BIG QUESTION

India’s equity-tax debate has reopened just as foreign portfolio investors are selling heavily and the government begins preparing the next Union Budget. On October 13, 2026, Finance Minister Nirmala Sitharaman said the government was open to hearing views on long-term capital gains (LTCG) tax and Securities Transaction Tax (STT), but declined to commit to any change. That is an invitation to debate—not a promise of relief. [1][2]

The issue is more complicated than a simple choice between high taxes and rising markets. Taxes affect post-tax returns and trading costs, but global interest rates, oil prices, currency movements, valuations and earnings also shape investor decisions. Any credible analysis must keep those forces in view.

1. Two different taxes—and two different policy goals

LTCG tax is charged on qualifying realised gains when an investor sells an asset. STT is a transaction levy applied to specified securities transactions through recognised exchanges. It can be payable even when a trade is unprofitable, because it is linked to the transaction rather than the investor’s net profit. The two taxes therefore affect market participants in different ways.

The July 2024 changes raised the tax rate on qualifying long-term gains from listed equity shares and equity-oriented funds from 10% to 12.5%, while increasing the annual Section 112A exemption threshold from ₹1 lakh to ₹1.25 lakh. The short-term capital-gains rate on qualifying listed equity transactions rose from 15% to 20%. These rates apply subject to statutory conditions. [3]

The change in LTCG rate

Tax / transaction	Current treatment (headline rate)	Important qualification
Listed equity LTCG	12.5% on qualifying gains above ₹1.25 lakh	Applies to eligible transfers on/after 23 July 2024; statutory conditions apply
Listed equity STCG	20%	For qualifying transactions covered by Section 111A
Equity futures STT	0.05% on sale-side traded value under 2026 changes	Transaction tax; not a tax on net profit
Equity options STT	0.15% on option premium on sale under 2026 changes	Exercise transactions have separate treatment

Rates are summarised for general explanation; confirm the exact instrument, transaction date and applicable provisions against the official tax rules before relying on them. [3][4]

Rates are summarised for general explanation; confirm the exact instrument, transaction date and applicable provisions against the official tax rules before relying on them. [3][4]

Rates are summarised for general explanation; confirm the exact instrument, transaction date and applicable provisions against the official tax rules before relying on them. [3][4]

Rates are summarised for general explanation; confirm the exact instrument, transaction date and applicable provisions against the official tax rules before relying on them. [3][4]

2. The 2026 STT increase: Why derivatives traders notice it

The 2026 Budget raised STT on equity futures from 0.02% to 0.05% of the sale-side traded value, and on options from 0.1% to 0.15% of the option premium on sale, with the revised rates applying from April 1, 2026. The official Budget FAQ also specifies a separate rate for options exercised. [4]

For high-turnover strategies, small changes in transaction costs can matter because they recur across many trades. Arbitrage, market-making and active derivatives strategies may be affected differently depending on turnover, spreads, hedging costs and their specific tax treatment. A single estimate of annual yield compression should not be applied to every fund or strategy without a transparent methodology.

Illustrative pre-change STT rates

The chart compares headline rates before the 2026 changes only to show the scale of the old rates. Futures STT and options STT use different calculation bases, so their bars are not an apples-to-apples comparison.

3. Foreign investor outflows: Tax matters, but it is not the whole story

Recent reporting says foreign investors have withdrawn more than ₹3 lakh crore from Indian equities in 2026, with flows pressured by factors including elevated crude prices, a firmer US dollar and higher US bond yields. The government is examining proposals to review LTCG tax, but officials have not announced a rollback. [1][2]

Higher transaction costs and taxes can reduce net returns at the margin. Yet it would be inaccurate to attribute the full outflow to STT or LTCG alone. Portfolio flows respond to relative valuations, earnings prospects, currency expectations, global liquidity and investment opportunities elsewhere. Tax reform may improve competitiveness, but cannot guarantee a rapid return of foreign capital.

4. The fiscal trade-off: Relief has a price

Capital-gains taxes contribute revenue to the government. A rollback could improve investors’ post-tax returns, but it would also carry a fiscal cost that must be weighed against other spending priorities and revenue needs. The government therefore faces a balancing act: keep the tax base productive, avoid unnecessary friction in capital formation, and preserve fiscal discipline.

SBI Research has argued for removing LTCG tax on equities and lengthening the holding period used to distinguish short-term from long-term gains. This is a policy recommendation, not government policy. A tiered rate for longer holding periods is another idea discussed by market participants, but no such change has been announced. [2]

5. What could the government do?

Possible option	Potential benefit	Trade-off / uncertainty
Keep current rates	Predictable revenue; no immediate fiscal cost	Investors continue to bear current tax and transaction costs
Reduce STT selectively	Lower friction for affected trading activity	Revenue impact; effects on turnover and liquidity are uncertain
Reduce LTCG rate or raise exemption	Improves post-tax return for eligible investors	Fiscal cost; benefit distribution may be uneven
Tier rates by holding period	Could reward longer-term investment	More complexity; design and anti-avoidance rules matter

These are policy scenarios, not forecasts. Their effects would depend on the details of any legislation and on market conditions at the time.

6. What investors should watch—not assume

·       The Finance Bill and explanatory memorandum accompanying the next Union Budget.

·       Whether any proposed change covers domestic investors, foreign portfolio investors, or particular instruments only.

·       The precise STT calculation base and effective date for each instrument.

·       Foreign portfolio flows alongside the rupee, crude oil, US yields, valuations and corporate earnings.

·       Whether any relief changes long-term investment behaviour or merely shifts the timing of transactions.

BIZ MASALA VERDICT

India’s equity-tax debate is now firmly back on the policy agenda. The July 2024 capital-gains changes and the 2026 derivatives STT increases have raised legitimate questions about post-tax returns and the cost of high-turnover trading. The Finance Minister’s October 13 remarks show that the government is willing to hear those concerns—but they do not establish that relief is imminent.

A sound policy response would assess the combined effect of LTCG, STT, market liquidity, investor protection and fiscal revenue, rather than treating foreign outflows as proof that one tax caused the problem. The key question ahead of the next Budget is not simply whether taxes will fall, but whether any change can improve market competitiveness without undermining revenue stability or encouraging excessive speculation.

For investors, the prudent approach is to plan using the law in force today—not a hoped-for tax cut.

Sources & reporting notes

1.     [1] Financial Express, 13 October 2026 — FM opens debate on LTCG and STT. https://www.financialexpress.com/market/markets-rebound-as-fm-opens-door-to-debate-on-ltcg-tax-stt-4360440/

2.     [2] Moneycontrol, 13 October 2026 — government reviewing proposals; no commitment to change. https://www.moneycontrol.com/news/business/markets/will-be-keenly-hearing-views-on-ltcg-tax-removal-says-nirmala-sitharaman-14050987.html

3.     [3] Income Tax Department — Tax on sale of shares / capital gains rates. https://www.incometaxindia.gov.in/en/sale-of-shares

4.     [4] Income Tax Department — Budget 2026 FAQ on STT rates. https://incometaxindia.gov.in/Documents/Budget2026/FAQs-Budget-2026.pdf

Editorial note: Figures and policy positions reflect sources available as of 19 October 2026. Forecasts and stakeholder proposals are identified as such; no causal claim is made that taxes alone drove foreign investor outflows. This article is independent analysis, not investment or tax advice.

 

 

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