That belief, however, is not permanent. It needs to be reinforced as investors’ financial commitments grow year after year. In a truly VUCA world, this Budget arrives at a time when markets are seeking something more fundamental and predictable.
Taxation is one area where confidence needs to be strengthened. India’s capital market taxes are often discussed in isolation, but investors do not think that way. Capital is global, and comparisons are inevitable.
Take the Securities Transaction Tax (STT). India remains one of the very few major equity markets to levy a transaction-level tax on every trade. The United States does not have it. Japan does not have it. Most Southeast Asian markets, including Singapore and Hong Kong, have consciously stayed away from such taxes to keep markets liquid and competitive. Europe experimented with transaction taxes in select countries, only to see volumes migrate elsewhere.
STT may be easy to collect, but it is imposed irrespective of profitability. Over time, it becomes a tax on participation itself. Even a clearly articulated roadmap to gradually reduce STT would go a long way in improving market sentiment. Unfortunately, STT has been increased to relatively high levels in recent years, and the hope is that some relief will be provided this year.
The same logic applies to the Commodities Transaction Tax (CTT). Ever since CTT was introduced in 2013 on non-agricultural commodities, trading volumes have taken a significant hit. If the objective is to build deeper and more efficient commodity markets, this tax needs reconsideration. A mature commodity market is critical for supporting industrial users, infrastructure players, and broader commercial interests as the economy expands.
Long-term capital gains (LTCG) tax is another area where global context matters. The US taxes long-term gains but offers various incentives linked to holding periods and effectively adjusts for inflation through its tax structure. Many European countries tax long-term equity gains lightly or exempt them under specific conditions. Singapore and Hong Kong do not tax capital gains at all.India controversially reintroduced LTCG on listed equities in 2018. While investors have adapted, the bigger issue today is predictability, especially for foreign portfolio investors. Frequent interpretational challenges, treaty-related uncertainties, and the lingering fear of retrospective action add to India’s risk premium. Stability and simplicity would matter far more than marginal rate tweaks. Year-on-year changes, in particular, tend to unsettle investor sentiment.
Short-term capital gains are taxed across jurisdictions, but in India they sit atop an already high STT and other levies. Looking at each tax in isolation misses the point. Markets would prefer a simpler, more rational structure, even if it means lower rates combined with broader participation. After all, India’s scale, with over 13 crore unique demat accounts and a steadily growing base, can eventually compensate for lower rates through higher volumes.
Widening the tax base can unlock substantial government revenues through direct taxes and indirect levies such as GST.
Mutual funds deserve special attention in this discussion. The SIP culture has transformed Indian markets, with monthly inflows providing a steady counterbalance to volatile global flows. However, retail investors are extremely sensitive to tax changes. Sudden shifts in the taxation of debt or hybrid funds create confusion and hesitation, often pushing savers back toward unproductive assets such as real estate or low-yield, risk-averse instruments like bank fixed deposits. This is counterproductive to mobilising risk capital.
If India wants sustained domestic capital formation, mutual funds must be supported with predictable, long-term tax treatment. The objective should be to keep household savings firmly within the formal financial system.
Over the last two years, more than 500 companies have raised capital through India’s IPO markets. This reflects not just favourable market conditions but a growing entrepreneurial momentum. IPOs are where private ambition meets public participation, and retail investors have played an increasingly important role. They take risks by investing in newly listed companies, yet often feel penalised for protecting capital by selling post listing. Speculative behaviour is an inherent part of capital formation and should not be discouraged, as doing so may hamper efficient price discovery.
Today, retail investors directly own about 10% of India’s equity markets through direct stock holdings. Through mutual funds, they own another 10%. In effect, one-fifth of India’s listed equity wealth belongs to households—and this share continues to rise.
This is a structural shift that must be harnessed. Long-term participation cannot thrive in an environment where long-term savings are repeatedly taxed more than necessary. If policymakers want patient capital to fund capex cycles, innovation, and business expansion, long-term equity ownership must be actively encouraged.
The economy needs to regain momentum. From that standpoint, one of the most effective ways to do so may be through a decisive expansion of government capital expenditure, particularly in defence. Political instability in South Asia is deeply concerning. India stands out as the only stable and legitimate democracy in the region, surrounded by countries facing economic distress and political turmoil. This reality underscores the need for significantly higher investment in national security over the coming years.
Beyond defence, preparing infrastructure for a Viksit Bharat with multi-year visibility will be crucial for sustaining long-term growth. If the government is to meaningfully step up capital expenditure over the next year while maintaining fiscal discipline below 5%, it must sharply curtail revenue expenditure.
Currently, revenue spending accounts for nearly four-fifths of total government expenditure, while capex makes up just one-fifth. This rebalancing will be politically challenging, but it is necessary to secure long-term gains, even at the cost of short-term pain.
With inflation at relatively low levels, this may be the ideal time to roll out an ambitious, multi-year National Infrastructure Plan over the next five years.
(Tejas Khoday is co-Founder & CEO, FYERS)
