Will Union Budget 2026 address the double tax burden on stock market investments?

By Prachi Kulkarni, Tax Director, EY India
The Indian stock market, with easy investment plans like Systematic Investment Plans (SIPs) in mutual funds, has become a popular investment avenue for citizens, from seasoned investors to millennials. However, this journey is hindered by a double taxation structure comprising the Securities Transaction Tax (STT) and capital gains tax.

Understanding STT

STT is a tax imposed by the Indian government on the value of securities—such as stocks, mutual funds, and derivatives—traded on recognized stock exchanges. This tax is applied to the total value of securities bought and sold, regardless of whether the transaction results in a profit or a loss. As a result, investors must pay STT even when they do not gain from their investments.

STT was introduced in 2004 by then-Finance Minister P. Chidambaram, who also eliminated the long-term capital gains (LTCG) tax on securities traded on recognized exchanges. The rationale behind this move was to simplify the tax structure: the government would receive a steady, tax revenue, while investors would benefit from zero tax on long-term gains.

The return of capital gains tax

For 14 years, this system functioned smoothly. However, as the stock market began to yield significant returns, the government reintroduced the LTCG tax on April 1, 2018. Under this new regime, any long-term capital gains exceeding INR1 lakh in a financial year are taxed at 10%. This tax is calculated based on the cost of securities as of January 31, 2018, for those purchased before that date, without any adjustments for inflation.

While LTCG was reinstated, STT remained in place. Consequently, investors now face both STT on their transactions and a 10% tax on LTCG exceeding ₹1 lakh. What was initially intended as a replacement tax now exists alongside the very tax it was meant to supplant. Moreover, the LTCG tax rate was increased to 12.5% starting July 23, 2024, while the exemption limit for capital gains was only marginally raised to INR1.25 lakh.

Additionally, the short-term capital gains (STCG) tax, which applies to profits from securities held for less than a year, has also seen increases over time—from 10% to 15% in 2008, and then to 20% in 2024.

This means that for any transaction, an investor must first pay STT and then, depending on how long they held the securities, either 20% STCG or 12.5% LTCG on gains that exceed the exemption threshold. Notably, salaried individuals earning less than ₹12 lakh annually do not qualify for a rebate on LTCG, even if their total income, including LTCG, falls below this threshold. This forces them to pay tax on LTCG exceeding INR1.25 lakh, despite their overall income being modest.

The impact on investors

Eliminating the LTCG tax would significantly aid long-term investors, especially as savings have dwindled due to higher living costs. If complete removal of the tax is not feasible, a reduction in the LTCG rate from 12.5% to around 5% would be beneficial. Similarly, lowering the STCG tax from 20% back to its previous level of 10% could encourage more investment.

For India to maintain a vibrant stock market and encourage retail participation, decisive action is needed from policymakers to restore balance.

In conclusion, as we look forward to the Budget 2026, the hope is that it will address the double taxation issue that burdens investors. By reconsidering the current tax structure, the government can foster a more conducive environment for investment, ultimately benefiting the economy and the financial well-being of its citizens.

(Views expressed are personal.)
(Akshita Haria, Senior Tax Professional, EY India. Views expressed are personal.)