Bengaluru: Union Budget 2026 delivered a split verdict for Corporate India—offering measured tax rationalisation and incremental investment incentives while triggering one of the sharpest market corrections in recent memory. The Sensex plunged 2400 points on Budget day, wiping out nearly X13L crore in market capitalisation, as Finance Minister Nirmala Sitharaman's decision to raise the securities transaction tax on derivatives overshadowed more calibrated reforms to buyback taxation and foreign investment limits.
The divergence between policy intent and market reception reflects a budget designed for long-term structural competitiveness rather than immediate sentiment management. While industry bodies praised fiscal discipline and targeted manufacturing support, investors reacted negatively to the absence of capital gains tax relief and a steep increase in derivative trading costs—the second such hike in I8 months. The most immediate and severe market impact came from the government's decision to substantially increase the securities transaction tax (STT) on futures and options trading, effective April 1, 2026.
The Finance Minister announced that STT on futures would jump from 0.02 per cent to 0.05 per cent—a 150 per cent increase—while STT on options premium would rise from 0.10 per cent to 0.15 per cent, and on options exercise from 0.125 per cent to 0.15 per cent. This marked the second consecutive STT hike in 18 months. Budget 2024 had already raised futures STT from 0.0125 per cent to 0.02 per cent and options STT from 0.0625 per cent to 0.10 per cent, effective October 2024.
The cumulative impact is substantial: futures STT has quadrupled since mid-2024, while options STT has more than doubled. Post-budget briefings emphasised that the hike aims to discourage excessive retail speculation, address systemic risk concerns from high turnover and leveraged positions, and generate additional revenue for the government. The market's verdict was swift and brutal. Brokerage and exchange stocks—whose business models depend on trading volumes—bore the brunt of the impact. BSE Ltd crashed 13.5 per cent to an intraday low of Rs2,517.30. The broader market indices reflected this sentiment.
The Sensex fell below 81,000, down over 1,800 points, while the Nifty slipped below 25,000—marking the worst post-budget reaction since 2020, surpassing even the pandemic-era volatility. One notable tax change from a market perspective was the overhaul of buyback taxation. The Finance Bill 2026 restores a capital gains framework for share buybacks and introduces differential rates for promoters—a nuanced reform that addresses tax arbitrage concerns while providing meaningful relief to retail investors. The evolution of buyback taxation reflects three distinct regulatory regimes.
Prior to October 2024, companies paid a buyback distribution tax, while shareholders received the proceeds tax-free. Budget 2024 shifted this burden entirely to shareholders, treating the entire buyback amount as dividend income taxable at slab rates—potentially reaching 35% for high earners. Companies were required to withhold 10% TDS on payouts to resident investors (payouts above Rs5,000) and 20% on payouts to non-residents, subject to tax treaties. Budget 2026 restores the pre-2024 capital gains treatment but with an important modification. Share buyback proceeds will now be taxed as capital gains, with effective rates of about 22% for corporate promoters and 30% for non-corporate promoters, while regular shareholders pay the standard 12.5% long-term capital gains tax or 20% short-term capital gains tax.
The new structure eliminates this double taxation by treating the difference between buyback consideration and acquisition cost as capital gains, while the additional levy on promoters addresses their distinct position and influence in corporate decision-making. Companies also benefit under the new structure, as they no longer need to pay buyback distribution tax, making buybacks a cleaner and more efficient mechanism for returning surplus cash. This should revive buyback activity, which had slowed sharply under the dividend-based taxation framework introduced in Budget 2024.
The Finance Minister also steered clear of the long-pending request to waive capital gains tax for foreign portfolio investors, in line with global norms; that request was not approved. However, the Budget did raise equity investment limits for persons residing outside India (PROIs). Individual caps were doubled to 10 per cent from 5 per cent, while the aggregate limit was raised to 24 per cent from 10 per cent. The reforms explicitly permit PROIs—including non-resident Indians, overseas citizens of India, and foreign nationals—to invest in equity instruments of listed Indian companies through the Reserve Bank of India's Portfolio Investment Scheme.
The changes represent a meaningful structural shift in India's approach to foreign capital. Markets were expecting meaningful relief for long-term and short-term capital gains taxes, particularly after Budget 2024 raised LTCG from 10 per cent to 12.5 per cent and STCG from 15 per cent to 20 per cent. The exemption limit was increased from Rs1 lakh to Rs1.25 lakh, but investors had hoped for further increases to Rs1.5-2 lakh to account for growing retail participation— India now has over 140 million demat accounts.
The absence of any capital gains tax relief in Budget 2026 contributed significantly to the market sell-off. "Markets were expecting relief on LTCG or STCG in Budget 2026, which didn't happen and led to a bearish sentiment on the capital market stocks," noted market observers. The expectation was already priced in; its absence triggered profit-taking and a reassessment of equity valuations. Beyond the buyback reform, the Budget introduced changes to the Minimum Alternate Tax that could deter capital-intensive investments.
MAT rate was reduced from 15 per cent to 14 per cent, but MAT becomes a final tax from April 1, 2026, rather than a recoverable credit. Companies with accumulated MAT credit can utilise it only if they shift to the 22 per cent corporate tax regime, and only at 25 per cent of their annual tax liability— thereby extending utilisation to 4-6 years for companies with Rs50-100 crore in MAT credit and eroding present value.
