LTCG, STCG, STT, tax on dividend income: What stock investors should watch in Budget 2026

Tweaks to taxation on long-term capital gains (LTCG), short-term capital gains (STCG) and securities transaction tax (STT) are at the top of stock investors’ wish list as the Union Budget 2026 draws near. This comes after the past one year saw broader markets fare poorly, with only a limited set of stocks driving gains in key benchmarks.

Prior to April 1, 2018, LTCG arising on sale or transfer of listed equity shares were completely subject to certain conditions while other capital assets were subjected to a rate of 20 per cent with indexation (capital inflation) adjustment. 

With effect from 2018, a rate of 10 per cent without indexation was introduced that was further increased to 12.5 per cent with effect from July 23, 2024,  Rajarshi Dasgupta, Executive Director for Tax at AQUILAW noted.

For short-term capital gains, Dasgupta said that the rate has been increased from 15 per cent to 20 per cent  since July 23, 2024. 

"The increase in rate of long-term capital gains have been perceived by the markets in an apprehensive manner treating the same as a discouraging factor in investment in capital markets. Off late, there has been an increasing demand amongst the market participants for re-introduction of the exemption on long-term capital gains and a substantial reduction in the rate of short-term capital gains," he said.

Aditya Bhattacharya, Partner, King Stubb & Kasiva, Advocates and Attorneys said the Budget 2026 is expected to prioritise stability over sweeping changes. On LTCG and STCG, he said market participants will be watching for rationalisation, possibly a harmonisation of holding periods or marginal relief to encourage long-term investments and deepen retail participation. 

"Any upward revision in STT appears unlikely given its direct impact on market liquidity and trading volumes. On dividends, the current classical system of taxation at shareholders’ hands is expected to continue, though there may be limited fine-tuning to ease compliance or provide targeted relief to small investors. Overall, the emphasis is likely to be on predictability and investor confidence rather than aggressive revenue-driven measures," he said.

Dasgupta noted that market traders and investors have long been lobbying for reduction in the rate of STT or the securities transaction tax or the abolition altogether. However, the government views STT from a revenue generation perspective and any alteration in the rates is unlikely, he said.

"Prior to 2020 Companies distributing dividends used to pay lower tax of DDT and the income was exempt in the hands of recipients whose marginal rate of tax might be in the higher slab thus giving some benefit to the recipients. Currently, there is no tax paid by the companies on distribution of dividend to equity shareholders and the same is added to their regular income. Although this has resulted in streamlining of reporting and reduction in compliance oversight by the government, investors desire of re-instatement of dividend distribution tax which used to exist prior to 2020," Das Gupta said.