Union Budget 2026-27 –Implications for Equity Markets

1 Feb 2026 , 04:33 PM

ARE THE STOCK MARKET BEING TOO MYOPIC ABOUT THE UNION BUDGET?

Stock markets tend to be myopic, more often than not. As Keynes famously said, “Stock markets can be irrational, much longer than you and I can be solvent.” In a sense, the immediate reaction of the Nifty and the Sensex to the sharp hike in the STT rate was one of consternation. The indices fell sharply, but also bounced back sharply as the real picture began to dawn. To an extent, the markets may have been myopic about STT.

That is not to say that the STT increase will not matter. In fact, it will matter a lot. For instance, the increase of STT on futures was from 0.02% to 0.05%, which is 150% higher in absolute terms. Also, the STT on options was increased from 0.10% to 0.15%, an effective spike of 50%. Now, that is surely going to widen your break-even levels in a trade and make trading less profitable. It will also lead to a dwindling of volumes. Let us look at the details.

HOW MUCH DOES THE STT HIKE MATTER?

The STT hike is substantial in absolute terms; no two opinions about that. The STT on futures is up from 0.02% to 0.05%, while the STT on options is up from 0.10% to 0.15%. That is clearly not a small hike. Remember, STT is a cost that has a serious impact for 3 reasons. Firstly, the STT is charged on total transaction value and not on brokerage, so even if you charge zero brokerage, you still have to pay the STT.

Secondly, the STT has to be paid by every trade in the F&O market, irrespective of whether they make a gain or a loss. In capital gains, you only pay tax when you make profits, but STT is not like that. It is a rather ruthless tax. Thirdly, STT paid is not available as a write-off when you file returns as business income or as an individual. That is a major drawback as it reduces the tax effectiveness of the STT payout.

One argument is that the STT has been hiked only on F&O and not on cash market. But that is a flawed argument. For instance, most people use futures and options to either hedge an open position in equity or they do a covered call to reduce the holding cost. Quite often, traders take strategic view on volatility and play with straddles and strangles. Even mutual funds use F&O to take strategic positions and in their arbitrage funds. The impact is huge.

CAPITAL GAINS TAX HAS BEEN A MIXED BAG

It was a bit like adding insult to injury. People were expecting either an STT rate cut or a cut in capital gains tax to reduce the impact on double taxation. Instead, the budget has kept the capital gains tax static, while raising the STT on futures and options. At a net level, people will end up paying more and see their margin of safety in a trade narrowing. There were hopes that either the capital gains exemption limit would be raised, or the capital gains on equity held above 5 years would be fully tax-free. Neither happened.

But there was one positive takeaway on the capital gains front. The Union Budget has rationalized the taxation of buybacks. Currently, buyback proceeds are taxed as dividend income and the cost is treated as a capital loss to be written off against capital gains. This was a huge disconnect and had almost dried up buybacks. The budget has announced that buybacks will still be taxable in the hands of the investor, but as capital gains. That makes it simpler. Promoters will have to pay a higher tax, but it would still be economical.

A UNION BUDGET WITH GROWTH SUPPORTIVE MACROS

It was a budget with growth supportive macros and that is a great boost for the equity markets. Consider these pointers.

• The real growth rate for the coming years is pegged at around 7% with nominal rate of growth at 10%. That is the kind of growth that would be conductive to get domestic and global investors excited about the equity markets.
• Capex has been a big story in this budget. The capex of the centre, states and the CPSEs put together is likely to be above ₹17 Trillion in FY27, of which the central government direct allocation to capex would be around ₹12.2 Trillion. That is a substantial 22% hike over the previous year and is likely to give a boost to the equity markets.
• Defence spending was closely watched and it is up from ₹6.81 Trillion to ₹7.85 Trillion in FY27. That will have major implications for defence orders, defence spending, greater defence purchasing power etc. Also, a major chunk of ₹2.19 Trillion is by way of defence capex, which is growth accretive for equity markets.
• Finally, we look at fiscal responsibility. The government has committed to maintain fiscal deficit at 4.4% of GDP for FY26 and reduce it further to 4.3% for FY27. Markets were expecting 4.2% in FY27, but that is understandable amid falling revenues. A clear FRBP path is welcome for global investors. Also, the budget has targeted reduction of debt/GDP ratio to 50% by 2030, which will be another major positive.

Overall, if you ignore the STT myopia, one is inclined to admit that the budget does have a lot subtle push factors for the equity markets.

Summary The debate on equity markets almost centred entirely around the STT hike. However, as we have seen in the past, such STT hikes get absorbed and adjusted quite easily, and markets tend to internalize such changes in no time. Hence, concerns may be overstated. The bigger picture is that the budget has created a conducive environment for growth and fiscal prudence, which is the real essence of a growing economy. With India likely to still grow above the global large economy averages, investors should remain interested!