India’s equity markets continue to draw long-term optimism on strong fundamentals, but high transaction costs — especially Securities Transaction Tax (STT) and Long-Term Capital Gains (LTCG) tax — are
increasingly being seen as a drag on investor sentiment and market participation.
Market experts say the cumulative tax burden has raised the effective “hurdle rate” for returns, making trading and long-term investing less attractive, particularly for retail investors and foreign institutions.
Ahead of budget 2026, which will be presented in the Parliament by Finance Minister Nirmala Sitharaman, on Sunday, February 01, experts are urging the government to cut down STT and LTCG in order to boost market sentiments and keep the country’s
STT makes Indian markets costlier than peers
According to Dr. Ravi Singh, Chief Research Officer at Master Capital Services Ltd., the cost of transacting in Indian markets is significantly higher than in developed markets like the US, largely due to STT.
“Even in reality, LTCG and STT are sentiment-reducers, and this has often been understated. It is largely because of STT that the cost of transacting in the Indian market is much more than in countries such as the US,” Singh said.
He added that the changes introduced in 2024 have raised the bar for returns, which has impacted sentiment. “This could increase market access inequality by slowing retail inflows and favoring institutional players,” he noted.
However, Singh pointed out that India’s structural strengths — favourable demographics and earnings growth — continue to outweigh these frictions. He also stressed that policy stability is more important than the tax rates themselves, warning that frequent changes create uncertainty.
Foreign investors see taxes as structural headwind
Santosh Meena, Head of Research at Swastika Investmart, said the combined impact of higher STT and LTCG has emerged as a major sentiment dampener, particularly for Foreign Institutional Investors (FIIs).
“The elevated transaction costs have raised the profitability hurdle for equities and are increasingly viewed as a structural headwind by FIIs,” Meena said. With foreign investors already engaging in record selling, he believes India’s tax regime is losing competitiveness versus other emerging markets.
He added that the upcoming Union Budget is being closely watched for possible rationalisation of these levies. “This is not just about fiscal relief, but about sending a strong signal to arrest foreign outflows and revive confidence,” Meena said.
Call for rationalisation to boost liquidity
Echoing similar concerns, Pranay Aggarwal, Director and CEO of Stoxkart, said high STT and LTCG taxes are discouraging both traders and long-term investors.
“STT is levied irrespective of profitability, which raises trading friction and discourages liquidity providers, while LTCG reduces post-tax returns for long-term investors,” Aggarwal said.
He believes rationalising STT and easing LTCG could significantly improve market depth, liquidity, and long-term investor confidence, without undermining India’s broader growth story.
