As India heads toward the Union Budget 2026, the stock market community has already begun speculating about potential tax reforms. The government officially announced the commencement of the budget preparation process in early November, inviting suggestions from various industry bodies and associations. While the final budget will be presented on February 1, the groundwork and discussions have already begun, and this year’s focus seems to be shifting toward direct taxes and foreign investor sentiment.
Government Seeks Suggestions from Industry Bodies
The Ministry of Finance has requested recommendations from industry chambers such as the Institute of Chartered Accountants of India (ICAI) and PHDCCI. The PHDCCI, for instance, has proposed raising the income threshold for the 30% tax slab from ₹24 lakh to ₹50 lakh per year, suggesting that those earning above ₹50 lakh should fall under the highest bracket. While these are just proposals, they set the tone for what taxpayers and investors might expect in this year’s budget.
Stock Market Taxation: Long-Standing Dispute Over LTCG and STT
For stock market investors, the biggest question every year revolves around two taxes — Long-Term Capital Gains (LTCG) and Securities Transaction Tax (STT). This has been a subject of debate in nearly every budget discussion for decades.
Historically, LTCG tax and STT were never imposed simultaneously. Let’s briefly revisit the timeline:
1992: LTCG stood at 20% with indexation benefits, while STT did not exist.
1999: Investors were given a choice — pay 10% LTCG without indexation or 20% with indexation. Still, no STT was levied.
2004: Major reform year. LTCG was abolished, and STT was introduced at 0.1% to 0.15% on transactions.
2008: STCG was increased from 10% to 15%, while LTCG remained exempt.
2018: The government reintroduced LTCG at 10% on gains exceeding ₹1 lakh but retained STT, breaking the earlier principle of having only one of the two taxes.
2024: The government increased LTCG to 12.5% with a limit of ₹1.5 lakh and STCG to 20%, yet STT still remains.
This dual taxation—both LTCG and STT—has been a major point of frustration for investors. Many experts believe that either LTCG or STT should be eliminated, not both. Despite repeated appeals in every budget cycle, both taxes continue to coexist, burdening retail investors and traders alike.
Will 2026 Bring Any Change?
Historically, governments have shown little willingness to remove either tax completely. The probability of eliminating one of them, based on past experience, is extremely low — perhaps less than 1%. However, investors continue to hope that at least one of these levies will be reduced to boost market participation.
Foreign Investors and the Taxation Dilemma
Apart from domestic investors, there’s another critical issue — foreign institutional investors (FIIs) and their taxation structure. In 2025, India witnessed massive FII outflows — around $17 billion (approximately ₹1.4 lakh crore). This came after strong inflows in 2023 and 2024. The consistent withdrawal of foreign capital has made India one of the worst-hit markets in Asia in terms of portfolio outflows.
Experts suggest that high tax burdens are one of the reasons behind this trend. Renowned fund manager Samir Arora of Helios Capital openly criticized India’s capital gains tax on foreign investors earlier this year, arguing that it damages market sentiment and discourages long-term global participation.
He pointed out that foreign investors face double disadvantages — paying taxes in India, dealing with currency depreciation when converting rupees to dollars, and not being able to offset these taxes in their home countries due to differing tax treaties. In his words, “Such policies weaken India’s competitiveness and make our markets less attractive compared to other emerging economies.”
During the February 2025 budget presentation, Arora had urged the government to reconsider its taxation policy for foreign investors, arguing that the system unfairly penalizes them and pushes capital away from Indian markets. So far, no significant relief has been announced for FIIs, but market experts expect some possible reform this year.
Possible Budget 2026 Scenarios for the Stock Market
As per market discussions and early reports, there are two major areas investors are focusing on:
LTCG and STT Adjustment:
A recurring suggestion is that the government should either reduce or remove one of these two taxes. However, considering historical trends, the probability of such a move remains minimal. Still, many hope the government may at least tweak the rates or increase the exemption limits.Reforms for Foreign Investors:
There is growing speculation that the government could introduce reforms to attract more foreign capital. Given the significant outflows and the damage to market sentiment, reducing FII-related taxes or easing compliance norms could be one of the most probable steps in Budget 2026. The probability of such a reform is estimated at around 50%.
The Broader Market Context
To attract more global capital, Indian regulators such as SEBI and the Reserve Bank of India (RBI) have been working to simplify compliance requirements for foreign investors. There are also talks of increasing FII investment limits in public sector banks from 20% to 49%. These developments indicate that the government may indeed be preparing a more investor-friendly environment.
Conclusion
As Budget 2026 approaches, the anticipation among investors continues to rise. The key expectations are centered around tax rationalization — particularly the long-standing demand to remove one of either LTCG or STT — and policy clarity for foreign investors. While the probability of a major overhaul in LTCG or STT remains low, reforms for FIIs appear more likely.
Ultimately, the real picture will only become clear on February 1, 2026, when the Union Finance Minister presents the final budget. Until then, investors will be closely watching every update, hoping that this year’s budget finally brings long-awaited relief to the Indian capital market.
Disclaimer:This article is based on publicly available information, past budget trends, and expert commentary. It does not constitute financial or investment advice. Investors are advised to consult with financial professionals before making investment decisions.
