The Union Budget 2026-27 has outlined a careful yet significant path for India’s capital markets.
While the government did not make major changes to capital gains taxation, it introduced several important reforms that directly influence trading activities, corporate decisions, and foreign participation. These include a significant rise in Securities Transaction Tax (STT), changes to how buybacks are taxed, and broader access for Non-Resident Indians (NRIs), all aimed at promoting market stability over excess speculation.
The increase in STT is one of the most notable changes.
The tax on futures trades has gone up to 0.05 per cent from 0.02 per cent, and the STT on options premiums and options exercise has been raised to 0.15 per cent. This move is intended to reduce excessive short-term trading, especially in the derivatives market, where many retail traders consistently face losses. Higher transaction costs are likely to lower trading volumes among high-frequency traders, arbitrageurs, and retail investors who operate on narrow margins.
Market analysts suggest that the government’s focus is more on improving market quality rather than increasing tax revenue.
Given the large number of demat accounts and record mutual fund inflows, there is an intent to encourage long-term investment over speculative trading.
The Budget has also changed how share buybacks are taxed, with the goal of reducing tax loopholes and protecting minority shareholders.
Under the new rules, buybacks will be treated as capital gains for shareholders, replacing the previous system that often led to unfair tax treatment. Promoters, however, face a more stringent tax regime. Corporate promoters will pay an effective tax rate of 22 per cent, while non-corporate promoters will be taxed at 30 per cent, making buybacks less appealing as a tool for distributing profits.
For individual investors, this is a positive shift.
Instead of being taxed at the highest income tax rate, gains from buybacks will now be taxed at capital gains rates—20 per cent for short-term gains and 12.5 per cent for long-term holdings. Experts think this may lead companies to rethink how they allocate capital, possibly shifting towards dividends, capital spending, or research and development.
The government has also taken steps to allow Persons Resident Outside India (PROI) to invest directly in Indian equities via the Portfolio Investment Scheme.
The individual investment limit will rise from 5 per cent to 10 per cent, and the overall limit for all such investors will increase from 10 per cent to 24 per cent. This is expected to bring more stable, long-term capital into the market and reduce dependence on volatile institutional flows. It may also help in stabilizing the currency over time by leveraging the familiarity of overseas Indians with domestic business environments.
To discourage leveraged speculation, the Budget proposes removing the tax deduction on interest paid on loans used for investing in shares and mutual funds.
Currently, investors can deduct interest costs against their investment returns. Once this change is implemented, the benefit will no longer be available, thereby reducing the use of borrowed funds for market speculation.
This aligns with repeated warnings from regulators about excessive risk-taking and aims to safeguard retail investors from potential losses due to over-leverage.