One of the biggest overhangs is the increase in securities transaction tax (STT) on derivatives by up to 150%. The tax on futures has been raised to 0.05% from 0.02%, while for options it has been increased to 0.15% from 0.1%. Traders worry this could reduce activity in the futures and options segment, which has been a key driver of volumes and earnings for exchanges and brokerages.
STT, introduced in India on October 1, 2004, was meant to replace the long-term capital gains (LTCG) tax, curb evasion in equity and derivatives trades, and simplify tax collection. However, the Union Budget 2018 reintroduced LTCG on listed equities, while STT remained in place.
Samir Arora, Founder and Fund Manager at Helios Capital, struck a cautious note on the overall market direction.
"This was unexpected and negative for no reason, because it is clear that we introduced STT in lieu of capital gains tax. Now the STT are increasing more and more when India, last year underperformed markets by 20-30% in currency terms, even more maybe, and even this year, just in 30 days, the currency is depreciated related to US by 4-5% or so," Arora noted.
"Maybe there would have been no cut in capital gains tax; that even I didn't think much, but at this time, when the market is already showing weakness, to add one more thing is not required the long term," he said referring to the STT hike.
Arora expects “The market will fall much more,” pointing out that foreign investors are not showing strong interest, adding that “Tomorrow I am sure the currency will fall one more percent.”
Investors were also hoping for capital gains tax changes that would make India’s tax regime more aligned with global markets. Prashant Khemka, Founder of WhiteOak Capital, said, “So that could be partly negative. Otherwise, from a stock market, from an investor perspective, there isn't a major negative or a major positive. It is continuation of what was going on in the past.”
Another pressure point came from the government’s borrowing programme. The Centre plans to borrow a record ₹17.2 lakh crore from the market in 2026-27, higher than many street estimates. Higher borrowing is expected to push up bond yields, which can lead to mark-to-market losses on bond portfolios held by banks, especially public sector lenders.
PSU bank stocks saw selling pressure, with several state-run lenders falling between 2% and 6% as investors factored in the impact of rising yields on treasury books.
But not everyone sees the Budget as a clear negative. Madhu Kela, Founder of MK Ventures, said, “Budget is more or less in line with what was expected.” He believes the higher securities transaction tax may be negative for markets, but changes to buyback taxation could support companies.
Kela added that a lower buyback tax may push companies to return capital through buybacks instead of dividends. He also pointed to job creation schemes as the main structural positive from the budget. However, from a market point of view, he expects the event impact to fade quickly, saying the reaction could be over within about two days.
Navneet Munot, MD and CEO of HDFC AMC said, "Don’t go by the immediate reaction. Markets are spooked because of the STT, but I think overall what she mentioned in the first paragraph—reform over rhetoric, action over ambivalence, and people over populism—is structurally positive."
Nilesh Shah, MD of Kotak Mahindra AMC concurred. "Undoubtedly, the STT increase is beyond the market’s expectations. But in some sense, it is the syntax of the market. Nine out of 10 retail investors were losing money. The benefits were mostly going to the HFTs. Undoubtedly, the government had to take some steps. We can only pay that STT and capital gains tax. STT was introduced in lieu of capital gains tax. With increased STT, the Honourable Finance Minister may look to reconsider capital gains taxation," he noted.
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