Ahead of the Union Budget, to be tabled in Parliament on February 1 by Finance Minister Nirmala Sitharaman, markets are buzzing with hopes of tweaks to capital gains taxes and the securities transaction tax, even as investors expect few major surprises.

With foreign institutional investors (FIIs) continuing to pull out money, the government may consider easing some of the tax frictions in equities, said Sunny Agrawal, Head of Fundamental Research at SBI Securities. “There are high chances that the government may reduce LTCG, increase the exemption limit for the computation of capital gains, or reduce STT on cash transactions,” he said.

Agrawal further said that the objective would be to encourage long-term investing and reduce speculative trades. He noted that STT, which collects ₹20,000–21,000 crore annually, remains one of the highest implicit costs for equity investors.

Limited scope for dramatic policy moves

Beyond tax hopes, market positioning suggests limited expectations of dramatic policy moves. Ambit Capital said derivative positioning and trading activity point to a far lower build-up than last year. “Equity markets also appear to expect no big policy surprises in the FY27 Budget,” the brokerage said.

Focus on widening tax base

Brokerages say the finance ministry’s task will be to walk a fine line between supporting growth and sticking to fiscal discipline. JM Financial said investors are largely focused on continuity rather than headline reforms and warned that disruptive tax announcements could unsettle sentiment. It added that a sharp cut in capital expenditure — particularly below 3% of GDP — could hurt growth prospects.

On the tax front, JM Financial expects the emphasis to remain on widening the taxpayer base rather than broad-based rate cuts. While India’s taxpayer base has expanded significantly over the past decade, only about 81 million of the 116 million taxpayers currently file returns, leaving room to improve compliance without putting pressure on rates.

Tax competitiveness remains a key concern

Raising concerns over India’s tax competitiveness, Rajeev Gupta, Executive Vice President & Business Head – Third Party Products at Religare Broking, said high personal tax rates risk pushing capital and talent out of the country. “Our highest earners (₹2 crore-plus) currently face a peak tax rate of nearly 39% to 43%. This isn’t just a tax; it’s an exit trigger,” Gupta said, calling for rationalisation of surcharges and a cap on the effective tax rate at 30%.

Gupta also flagged the impact of higher capital gains taxes on long-term investing. “The 12.5% LTCG tax has created a ‘friction of success’. We urge a return to the 10% LTCG regime,” he said, arguing that taxing inflationary gains discourages long-term wealth creation.

From a global investor’s perspective, policy predictability will matter more than narratives. Jimeet Modi, Founder and CEO of SAMCO Group, said overseas investors allocate capital based on risk-adjusted dollar returns. “The bigger concern is not capital exiting India, but global capital simply choosing to look elsewhere,” Modi said, stressing the need for predictable regulation, lower transaction and tax frictions, and currency stability.

Sector impact and market risks

Meanwhile, Emkay Global expects the Budget to have a limited near-term impact on equities, with most potential measures likely to play out over the longer term. The brokerage said the composition of capital spending will be closely watched, with railways, defence, auto ancillaries and EMS seen as potential beneficiaries, while jewellery, life insurance and housing finance could face marginal pressure depending on tax decisions.

Agrawal of SBI Securities said markets could be disappointed by any sharp deviation from the fiscal consolidation path, an increase in capital gains taxes, or a material cut in capex. On the other hand, income tax relief, progress on public sector reforms, and reductions in LTCG or STT would be received positively by investors.

According to him, sectors that will be in focus this Budget include NBFCs, public sector banks, mid-sized private banks, auto and auto ancillaries, metals, OMCs and consumer discretionary, while real estate, housing finance, railways and defence tend to remain in favour due to their sensitivity to government spending and policy support.