LTCG Tax Vs STT: Which One Eats Into Your Stock Market Returns More?

Union Minister of Finance Nirmala Sitharaman has acknowledged the debate over securities transaction tax (STT) and long-term capital gains (LTCG) tax, including whether investors should pay both levies on their stock market investments. 

Earlier on October 13, 2026, she said there was “a lot of debate” around STT and that she would listen to different views. However, she did not announce any proposal to change the existing tax rules.

The issue boils down to whether investors should pay tax on stock market transactions as well as on the profits they earn from their investments. STT is charged on eligible market transactions, irrespective of whether they generate a profit or a loss. LTCG tax, on the other hand, applies to eligible profits from selling investments held for the long term. When both apply to the same investment, they add to the investor’s overall tax burden, although they are calculated differently.

“India is one of the few markets that charges both a transaction tax (STT) and capital gains tax on the same trade,” says Achin Bhardwaj, co-founder and chief investment officer at Daksham Capital.

So, which tax takes a bigger bite out of returns? The answer depends on how much an investor earns, how frequently they trade, and the value of their transactions.

LTCG Tax Vs STT: How Do The Two Taxes Work

Under the prevailing rules, eligible LTCG from listed equity shares and equity-oriented mutual funds are taxed at 12.50 per cent on aggregate gains exceeding Rs 1.25 lakh in a financial year, subject to applicable conditions. To qualify as long-term, listed equity shares and equity-oriented mutual fund units generally must be held for more than 12 months.

For instance, suppose an investor sells eligible equity investments and makes an LTCG of Rs 2 lakh during a financial year. Assuming the investor has the full annual exemption available, Rs 75,000 would be taxable at 12.50 per cent. The LTCG tax would amount to Rs 9,375, before applicable cess and surcharge.

The tax is calculated on eligible profits, not on the entire sale value. The Rs 1.25 lakh exemption applies to aggregate eligible gains during the financial year, not separately to each investment.

STT works differently. For delivery-based equity trades, it is charged at 0.10 per cent on both the purchase and sale value. For intra-day equity trades, the rate is 0.025 per cent on the sell side.

The rates for futures and options (F&O) were increased from April 1, 2026. STT on futures is now 0.05 per cent on the sell side. For options, it is 0.15 per cent on the premium on sale and 0.15 per cent of the intrinsic value when an option is exercised.

Unlike LTCG tax, STT is linked to transaction value rather than profit. An investor can, therefore, incur STT even when a trade ends in a loss.

How Much Can STT Cost An Investor

Consider an investor who buys and sells shares worth Rs 10 lakh through delivery-based transactions. Assuming the purchase and sale values are both Rs 10 lakh, STT would amount to Rs 1,000 on the purchase and Rs 1,000 on the sale, taking the total to Rs 2,000.

This cost applies regardless of whether the investor makes a profit or a loss. If the investor holds the shares for more than 12 months and subsequently realises eligible gains exceeding the annual exemption, LTCG tax may also apply.

This is where the two taxes overlap. STT is charged on the transactions, while LTCG tax is charged on eligible profits. The investor’s total tax outgo depends on the transaction values and the gains realised.

For active traders, the cost can accumulate more quickly because each eligible transaction attracts STT. Frequent buying and selling, particularly in derivatives, can increase the total amount paid even when the gains from individual trades are small.

Which Tax Hurts More: LTCG Tax Or STT

There is no clear winner, as the impact depends on how an investor trades and the returns they earn. For long-term investors who make substantial profits but buy and sell infrequently, LTCG tax may account for a larger share of their tax outgo. STT also applies to eligible transactions, but fewer trades generally mean lower cumulative transaction costs.

For active traders, particularly those with high turnover, STT can add up quickly. Every eligible transaction attracts the tax, even if it results in a loss. The higher STT rates on F&O, introduced in April 2026, make transaction costs an important consideration for derivatives traders.

The key difference is that LTCG tax is levied on eligible profits above the annual exemption, while STT is charged on the value of taxable transactions, regardless of whether they are profitable.

Investors should also factor in brokerage, exchange transaction charges, Goods and Services Tax (GST) and other applicable costs when calculating their net returns.

Why Is The Government Facing Calls To Review These Taxes

The debate is not limited to retail investors. Market participants argue that the combined tax burden can affect India’s competitiveness in attracting foreign capital and trading activity.

Bhardwaj said global investors compare returns after taxes and currency conversion. He argued that the combination of STT, capital gains tax and a weakening rupee can make Indian equities less attractive relative to markets, such as South Korea and Taiwan, which have benefited from investment linked to artificial intelligence (AI). 

“This double tax, along with a weakening rupee, erodes India’s appeal just as Korea and Taiwan attract flows on the AI-led technology rally,” he said.

He also argued that a lower STT could attract high-frequency traders, improve liquidity, and reduce execution costs. However, he said reforming the LTCG tax would be more important for attracting long-term capital.

One option he suggested was extending the short-term holding period to 2-3 years and abolishing LTCG tax beyond that period. He also suggested allowing foreign portfolio investors (FPIs) to calculate gains in foreign currency, so taxation better reflects their returns after currency movements.

However, foreign investor outflows cannot be attributed to taxes alone. Higher US bond yields, a stronger dollar, elevated crude oil prices and the movement of capital towards AI-focused markets have also affected flows into Indian equities. FPIs have sold equities worth Rs 3.12 lakh crore so far this year, according to National Securities Depository (NSDL).

What Should Investors Do

Investors should not base their investment or trading decisions on the possibility of a tax cut. Sitharaman has acknowledged the debate, but no change to the current rules has been confirmed yet.

Long-term investors should account for the LTCG exemption and tax when estimating post-tax profits. Active traders should track STT alongside brokerage and other transaction costs, particularly when trading frequently or dealing in F&O.