As India moves closer to the Union Budget, discussions around tax reforms and capital market stability have intensified. With November nearly half over and only around two months remaining before Budget Day, the government has already begun holding pre-budget consultations. In the latest round of discussions, representatives from the capital market industry were invited to present their expectations and concerns.

According to industry participants, four major demands have been placed before the Finance Ministry, with most of them centered around tax restructuring to make Indian markets more attractive and investor-friendly.

Increasing Household Participation in the Stock Market

The first suggestion presented by market experts focuses on channeling more household income into equity markets. Currently, only around 5.5 percent of household savings are invested in the market. Industry leaders have urged the government to push this figure to at least 7 to 8 percent.

To achieve this, they have recommended making the overall market environment more investor friendly by reducing certain taxes that act as barriers. The demand is not for complete removal of taxes but for reasonable concessions that could make equities a more appealing investment option for the average Indian.

Rationalizing Dividend Taxation for Domestic Investors

The second major concern raised relates to the tax treatment of dividend income. Industry players argue that the current structure creates inequality between domestic investors and NRIs. At present, NRIs are taxed at a flat 20 percent on dividend income, while resident individuals are taxed according to their applicable income tax slab.

This means that investors falling in the highest tax bracket end up paying tax rates of 30 percent plus surcharge, which can go up to 40–42 percent at the uppermost level. The industry has requested that domestic investors also be allowed the same flat 20 percent rate on dividend income.

They believe this move would not only simplify compliance but also reduce the burden on high-tax bracket investors who currently face a significantly higher outflow compared to NRIs.

Reconsidering STT in the Cash Market Segment

The third long-standing demand from the market pertains to the Securities Transaction Tax (STT). Historically, STT was introduced in 2004 when long-term capital gains (LTCG) tax with indexation benefits was removed. However, in 2018, LTCG was reintroduced at 10 percent without indexation for gains above one lakh rupees, while STT continued to remain in place.

This effectively resulted in two layers of taxation, leading to dissatisfaction among investors. While industry delegates are not asking for STT to be completely removed, they have urged the government to at least reduce STT on cash market transactions. They argue that encouraging long-term investing requires making the cash market more attractive, and a reduction in STT would be a step in that direction.

The derivative market and cash market currently carry the same STT rates, despite serving different investor bases. Market representatives say that lowering STT on the cash market could promote genuine investment over speculative trading.

Simplifying Buyback Taxation and Allowing Cost Deduction

The fourth and most complicated issue discussed during the meeting was the taxation of buybacks. Before October 1, 2024, buyback proceeds were tax-free for shareholders, and the company was responsible for paying buyback tax. However, the post-October 2024 rule overhaul now treats buyback proceeds as deemed dividend, which is taxable as per the shareholder’s income tax slab.

This shift has resulted in a heavy tax burden for investors in higher tax brackets, discouraging participation in buybacks. Moreover, the current rule does not allow deduction of the cost of acquisition (COA) while calculating tax on buyback income.

For example, if a shareholder bought shares for three lakh rupees and tendered them in a buyback for ten lakhs, the entire ten lakhs is considered income for taxation, rather than the seven lakhs of actual profit. The cost of acquisition can only be claimed separately as a capital loss, creating unnecessary complications.

Industry members have requested that at least the cost of acquisition be allowed as a deduction from buyback proceeds so that taxes apply only to actual profits. They argue this would bring fairness and clarity to the system and revive investor interest in buybacks.

What Will the Government Consider?

All four demands—higher household participation, better dividend tax parity, reduced STT for cash market trades, and simplified buyback taxation—are centered around easing investor burdens and encouraging greater participation in Indian equity markets.

Whether the government will accept these suggestions remains to be seen. The final decisions will be known on February 1, Budget Day. Investors now await to see how many of these requests will be addressed: one, two, all three major tax-related demands, or perhaps none.

Disclaimer

This article is based on publicly available information, market discussions, and industry viewpoints shared during the pre-budget consultation. It is intended for informational purposes only and should not be considered financial or investment advice. Readers are advised to consult their financial advisor before making any investment decisions.