As the Union Budget 2026 approaches, equity investors are seeking revisions to the long-term capital gains (LTCG) tax and the securities transaction tax (STT) in order to reduce the tax burden on investments. The cumulative effect of increased LTCG tax and STT has made investing less appealing, particularly for retail investors.

LTCG Tax

Long-term capital gains tax applies to profits from the sale of assets held for more than a year. For listed equity shares and equity-oriented mutual funds, LTCG is taxed at 12.5% if the gains exceed ₹1.25 lakh in a financial year. This tax was introduced in 2018, removing the previous exemption on LTCG for equity shares and equity-oriented funds.

Suggestions have been made to reduce the LTCG tax rate to 5% for long-term holdings, potentially making equity markets more attractive to domestic savers. Some experts suggest extending the period for claiming LTCG benefits from one year to two years and moderating the tax rate.

Securities Transaction Tax (STT)

The STT is levied on transactions in the stock market. Originally introduced in 2004 when long-term capital gains on equities were exempt, its relevance is now being questioned. The STT on options sales was increased from 0.0625% to 0.1% of the option premium, while for futures trades, it rose from 0.0125% to 0.02% of the traded value.

Some argue that the STT has outlived its original purpose due to modern reporting systems. The increase in STT rates has further reduced the appeal of market-linked products, especially for long-term savers.

Impact and Expectations

The combined effect of LTCG tax and STT reduces net returns, especially for retail investors making small investments through systematic investment plans (SIPs). The government is expected to focus on clarifications, taxpayer relief, and resolving interpretational issues rather than major reforms in the upcoming budget. One potential relief measure is extending the Section 87A rebate to long-term capital gains.

The Confederation of Indian Industry (CII) has also urged the government to accelerate the privatization of public sector enterprises (PSEs) through a more market-driven approach. CII proposes a three-year privatization plan and suggests reducing the government's stake in listed PSEs to 51% in a phased manner. This could unlock approximately ₹10 lakh crore for infrastructure development and fiscal consolidation.

Overall, equity investors are seeking a stable and predictable tax regime with potential relief on LTCG and STT to encourage long-term investment in the equity markets.