In an effort to curb excessive short-term speculation and bring equity tax more in line with other asset classes, the government increased the short-term capital gains tax on equities from 15% to 20% in 2024. At the same time, long-term capital gains tax was increased from 10% to 12.5%. To cushion the impact on retail investors, the exemption threshold for LTCG was increased from Rs 1 lakh to Rs 1.25 lakh per financial year. It is important that the indexation benefits have not been reintroduced.As things stand now in the run-up to Budget 2026, short-term capital gains on listed shares are taxed at 20%, while long-term capital gains are taxed at 12.5% on gains above Rs 1.25 lakh, provided STT has been paid.
The same budget also increased the STT for futures from 0.0125% to 0.02% and for options from 0.0625% to 0.1%, an increase of around 60%. According to Kamath, the immediate impact of this increase was masked by the bull market, which saw strong participation and high trading volumes despite higher costs. However, he said the effect became visible over the past year as market conditions normalized.
Kamath pointed to a shortage of STT collections compared to government projections to buttress his argument. The Budget had estimated STT collections for FY26 at around Rs 78,000 crore. Actual collections till January 11 are around Rs 45,000 crore. Even if we assume another Rs 12,000 crore is collected by March 31, the total STT revenue would be roughly Rs 57,000 crore, almost 25% lower than the expected figure.
According to him, the higher tax rate may have been counterproductive. Kamath suggested that the government might have collected more revenue if the STT had not been increased so sharply in 2024, as higher transaction costs often reduce trading activity once markets emerge from a strong bull phase. He also acknowledged a potential conflict of interest, noting that brokers like Zerodha would benefit from a lower STT, and therefore his opinion is naturally biased. Still, he argued, the data indicates that the elasticity of trading volumes relative to transaction costs becomes more apparent during sideways or volatile market phases.
Kamath’s comments have added to the broader market debate ahead of the budget, especially as several brokers have said expectations are low and major changes in capital market taxes are unlikely. With the Budget being presented on a Sunday this year and markets remaining open, trading behavior may also look different on that day.
Kamath noted that Zerodha is one of the few brokers that allows buy-today-sell-tomorrow trades on Sundays, while mutual fund investors should be aware that same-day net asset value will not be available for purchases made on that day.
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