STT and LTCG: How best can the Budget change the situation?

Among the several reasons for the rally this week, was the hint from the Finance Minister that the centre was willing to take a relook at STT and LTCG tax. The question is how much of difference can the government make?

Can we expect changes in STT in the Budget?

For the ongoing fiscal (FY27), the STT collections had crossed ₹40,000 crore in the first half ending September 2026. That means; full year STT collections would be in the region of ₹90,000 crore to ₹95,000 crore. STT is an assured flow to the government on the transaction value and not on gains or losses. It is simple and has been growing consistently year over year. The government will be unwilling to let go such a cash cow. Will it reduce the rates? At best the recent hike in STT rates on futures and options may be retracted, but any major change in the STT rates looks very unlikely.

Will the Budget tinker with STCG and LTCG tax?

The government does not disclose the STCG tax numbers separately, but it is estimated to be less the LTCG tax collections. Recently, the government had substantially rationalized the rates of tax for STCG and also the holding period to a maximum of 2 years. STCG tax (depending on the asset class) is either taxed at 20% or the incremental rate of tax applicable. LTCG tax generated a whopping ₹1.29 trillion for the government in FY25, and subsequent numbers are not available. However, FY26 and FY27 may be lower. With the base rate on equities at 12.5% and the enhanced annual exemption at ₹1.25 lakhs, not much change can be expected. At best, we can see minor tinkering.

What tax strategy must the Budget focus on?

India has to encourage people to focus on financial planning if the long-term goal of financial security has to be achieved. That has two assumptions. Firstly, debt funds are taxed at an unfairly high rate. Today, short term gains tax on equity is lower than the tax you pay on interest. That is skewing ownership patterns away from healthy debt assets. The other thing the government must consider is special tax incentives for mutual fund investments. After all, they have emerged as the veritable vehicle for realizing long-term financial goals. It is high time the upcoming budget focuses purely on special tax incentives for equity funds and debt funds; as a boost to financial planning.

Procedural anomalies need to be addressed

There are several anomalies that need to be addressed. While calculating capital gains for tax purposes, investors filing for capital gains are not allowed to claim STT as a legitimate expense. That is unfair and leads to double taxation. This benefit is only available if you report gains as business income. Secondly, treating F&O as non-speculative and intraday as speculative is unfair to people who are using their equity holdings to trade in the market for short-term profits. Lastly, by default, the government tends to delay tax refunds where loss set-offs are involved. That also needs to be plugged as it locks up precious working capital for investors. It is time to make a small start in this budget!