India’s equity markets have lived through a turbulent financial year, marked by sharp drawdowns, rapid recoveries, and new all-time highs. Yet amid this volatility, investor demands from the Union Budget have remained strikingly consistent. Market participants continue to call for a rollback or rationalisation of securities transaction tax (STT) and capital gains taxes, arguing that the current structure penalises both trading activity and long-term investing.

The context to these demands lies in changes announced in the 2024 Union Budget, when transaction and capital gains taxes were raised sharply. The STT on options was increased to 0.1 percent of the option premium from 0.0625 percent earlier, while the STT on the sale of futures contracts rose to 0.02 percent from 0.0125 percent. In the cash market, equity delivery trades continue to attract STT on both the buy and sell side, amounting to 0.1 percent of transaction value or ₹100 for every ₹1 lakh traded.

Alongside transaction taxes, capital gains taxation was also tightened. Long-term capital gains (LTCG) tax on equities was increased to 12.5 percent from 10 percent, while short-term capital gains (STCG) was raised to 20 percent from 15 percent. These hikes came at a time when global markets were already volatile, leaving investors with thinner post-tax returns even in profitable years.

What is changing now is not policy but pressure. Brokers, asset managers, and active investors argue that the cumulative tax burden has become excessive, particularly for long-term savers. Several market voices have advocated scrapping STT entirely in the cash market, while others have pitched for a rollback of LTCG to earlier levels or even its removal. Their argument is straightforward: higher friction costs discourage participation, especially when returns are uneven.

This debate is unfolding against a backdrop of structural shifts in India’s equity ecosystem. According to Vanita Salian Bangera, Head of Institutional Sales Trading at Aikyam Capital Group, domestic flows have emerged as a stabilising force. Average monthly SIP inflows have doubled to ₹28,202 crore in FY26 from ₹13,000 crore in FY23, underlining the growing role of retail investors in cushioning global shocks.

Bangera argues that, in this environment, rationalising LTCG should be seen less as a tax giveaway and more as a behavioural lever. Even small improvements in post-tax returns, she notes, compound meaningfully over long holding periods and strengthen household participation in financial assets. This is particularly relevant for India, where financialisation of savings remains a long-term policy objective.

However, not all market observers expect relief. Saurav Ghosh, co-founder of Jiraaf, believes the scope for major tax changes is limited. He points out that both direct and indirect tax regimes have undergone substantial reform over the past year, making significant rate cuts unlikely beyond clarifications or minor adjustments.

Why this matters for markets goes beyond sentiment. Transaction taxes like STT directly impact trading volumes, liquidity, and price discovery, particularly in derivatives where margins are already tight. Higher capital gains taxes reduce effective returns, potentially altering asset allocation decisions over time. For policymakers, however, these levies are reliable revenue sources, especially when market participation is expanding.

From an Indian market perspective, the immediate impact of any tax change would be felt across brokerages, asset managers, and retail participation levels. Lower STT could improve turnover and liquidity, while LTCG relief could tilt savings further towards equities and mutual funds. Conversely, maintaining the status quo preserves fiscal certainty but risks dampening enthusiasm at the margin.

Sectorally, capital market intermediaries would be the most sensitive to any policy shift, followed by mutual fund flows and retail trading behaviour. Broader indices may react more on sentiment than fundamentals, unless changes are sweeping.

In a bull scenario, even modest tax rationalisation could reinforce India’s equity story by boosting long-term participation and improving post-tax returns, particularly for SIP-driven investors. In a bear scenario, unchanged or higher taxes could exacerbate volatility by reducing risk appetite when returns are already under pressure.

The key risk lies in expectation mismatch. Markets often price in tax relief hopes that may not materialise, leading to short-term disappointment. With fiscal discipline remaining a policy priority, investors may need to brace for continuity rather than concessions.