As Finance Minister Nirmala Sitharaman prepares to present the Union Budget 2026 on Sunday, February 1st, all eyes are on potential policy revisions that could stimulate the Indian stock market. Investors are keenly awaiting announcements related to long-term capital gains (LTCG) tax, securities transaction tax (STT), and income tax cuts, anticipating that these measures could revitalize market sentiment and Foreign Portfolio Investment (FPI) flows.
Long-Term Capital Gains (LTCG) Tax Currently, LTCG on equity and equity-oriented mutual funds are taxed at 12.5% for gains exceeding ₹1.25 lakh in a financial year. Market participants are hoping for a reduction in this rate to 10% and an increase in the exemption limit. Some are even suggesting a complete exemption on LTCG arising from equity mutual fund investments held for more than five years to encourage long-term wealth creation. Experts believe that rationalizing LTCG tax could significantly boost market sentiment, particularly amid concerns about Foreign Institutional Investor (FII) selling and geopolitical uncertainties. A reduction in LTCG tax could improve post-tax returns, making Indian equities more attractive and encouraging greater market participation.
Securities Transaction Tax (STT) Another key expectation is a reduction in the Securities Transaction Tax (STT) on cash market trades. Currently, STT stands at 0.1% on delivery-based equity transactions and 0.02-0.125% on derivatives. Market bodies, including BSE, MCX, and AMFI, have reportedly advocated for this reduction. Lowering STT could reduce transaction costs, encourage long-term investing, and attract more Foreign Institutional Investors (FIIs). Nithin Kamath, Founder of Zerodha, pointed out that the impact of a 60% hike in F&O STT in Budget 2024 was not immediately apparent due to the ongoing bull market but showed up in the following year. He suggested that the government might have collected more revenue without the 2024 hike.
Income Tax Cuts and Other Measures
In addition to LTCG and STT, the industry is also expecting meaningful tax relief for homebuyers, specifically an increase in the current ₹2 lakh annual deduction on home-loan interest under Section 24(b) and a separate housing-linked deduction beyond the existing ₹1.5 lakh limit under Section 80C. These measures could translate into annual tax savings of ₹50,000 to ₹1 lakh per homebuyer and improve effective housing affordability by nearly 10–15%.
Furthermore, there's a push for greater tax parity across financial products. Experts advocate for tax parity for debt instruments and structured products, many of which are currently taxed at marginal slab rates, often exceeding 40% including surcharge and cess, to create a more equitable framework that supports conservative and long-term wealth creation.
The government is also introducing a ₹23,000 crore incentive package to boost domestic production of high-value goods. Sectors like construction machinery and advanced auto components are likely to benefit from this package. Additionally, the budget places heavy emphasis on residential construction through the SWAMIH Fund-2, which has a ₹15,000 crore corpus to complete one lakh dwelling units. This is expected to drive demand for cement and steel stocks.
Impact on Market
The Indian stock markets have faced significant FPI outflows, with ₹33,598 crore in January 2025 and a total of ₹166,286 crore in 2025. Despite the BSE Sensex's 9% gain extending its 10-year bull run, India has underperformed Asian peers due to this foreign investor exodus. The upcoming budget is seen as a crucial opportunity to restore foreign investor confidence.
However, some analysts believe that tax cuts alone won't reverse FPI selling without earnings recovery and clarity on the India-US trade deal. Stability in policy matters more than sops. A growth-oriented budget that keeps government spending under control could support market sentiment.
Key Stocks to Watch
Ahead of the Union Budget 2026, several stocks are likely to stay in focus as investors look for signals from government policies. Defence stocks such as Bharat Electronics and Hindustan Aeronautics are being watched closely, as any increase in defence spending could impact them. Shares linked to railways and infrastructure may also react if the Budget announces higher spending on projects. In the power space, Power Grid and NTPC are in focus due to recent developments.
Overall, the market anticipates that the Union Budget 2026 will introduce measures to boost investor sentiment, encourage long-term investments, and attract foreign capital. Whether these expectations will translate into reality remains to be seen, but the market's reaction will undoubtedly shape the trajectory of Indian equities in the coming year.
