Strong fundamentals continue to inspire long-term confidence in India’s equities markets, but high transaction costs, particularly the Securities Transaction Tax (STT) and Long-Term Capital Gains (LTCG) tax, are increasingly perceived as a deterrent to investor sentiment and market participation.
According to market experts, the cumulative tax burden has increased the effective “hurdle rate” for returns, making long-term investing and trading less appealing, especially to international institutions and retail investors.
Experts are advising the government to reduce STT and LTCG ahead of the 2026 budget, which Finance Minister Nirmala Sitharaman will give to the Parliament on Sunday, February 1, in order to improve market mood and maintain the nation’s
Indian markets are more expensive than rivals due to STT.
Dr. Ravi Singh, Chief Research Officer at Master Capital Services Ltd., claims that STT is a major factor in the much higher transaction costs in Indian markets compared to industrialized markets like the US.
It has frequently been overlooked that LTCG and STT are actually sentiment-reducers. The cost of doing business in the Indian market is significantly higher than in nations like the US, mostly because to STT, Singh stated.
He continued by saying that mood has been affected by the 2024 amendments that raised the bar for returns. He pointed out that “by slowing retail inflows and favoring institutional players, this could increase market access inequality.”
Singh did note that these frictions are still outweighed by India’s fundamental strengths, which include favorable demographics and incomes growth. Additionally, he warned that frequent adjustments lead to confusion and emphasized that policy stability is more significant than the tax rates themselves.
Taxes are viewed by foreign investors as a structural obstacle.
The combined effect of rising STT and LTCG has become a significant sentiment dampener, especially for Foreign Institutional Investors (FIIs), according to Santosh Meena, Head of Research at Swastika Investmart.
“Elevated transaction costs have increased the profitability barrier for stocks and are increasingly perceived by FIIs as a structural headwind,” Meena stated. He feels that India’s tax system is becoming less competitive when compared to other emerging nations because foreign investors are already selling records.
He continued by saying that any potential rationalization of these charges is being attentively monitored in the next Union Budget. Meena stated, “This is about sending a strong signal to stop foreign outflows and revive confidence, not just about fiscal relief.”
Demand rationalization in order to increase liquidity
High STT and LTCG taxes are deterring both traders and long-term investors, according to Pranay Aggarwal, Director and CEO of Stoxkart, who expressed similar worries.
According to Aggarwal, “STT is imposed regardless of profitability, which increases trading friction and deters liquidity providers, while LTCG lowers post-tax returns for long-term investors.”
He thinks that without jeopardizing India’s larger economic narrative, rationalizing STT and lowering LTCG could greatly increase market depth, liquidity, and long-term investor confidence.
