Key Takeaways
- Buyback re‑taxed as capital gains lifts IT stocks like Wipro and TCS.
- Reduced TCS on overseas tour packages fuels a rally in Easy Trip and other tourism names.
- Unchanged customs duty on gold keeps jewellery stocks buoyant.
- STT on futures and options jumps to 0.05%, dragging down MCX, Angel One and BSE.
- PSU banks and defence firms face headwinds due to merger anxieties and modest capex hikes.
The Hook
You missed the budget’s fine print and watched your portfolio bleed.
Union Budget 2026 Impact on Indian Equities
On February 1, the Sensex slipped 1,547 points (‑1.9%) and the Nifty 50 fell 495 points (‑2%). The plunge was not random; it reflected a clash between market‑friendly announcements and policy moves that raised trading costs. Understanding the anatomy of this swing is essential for anyone with exposure to Indian equities.
Buyback Tax Shift: Winners in the IT Sector
The Finance Minister announced that buybacks will now be taxed as capital gains for shareholders, while promoters incur an additional levy. This reversal from the dividend‑tax regime removes a double‑taxation burden that had discouraged companies from using buybacks as a capital‑return tool.
Why does this matter? IT giants—Wipro, Tata Consultancy Services, Infosys, LTIMindtree and Persistent Systems—have historically used buybacks to manage share dilution and signal confidence. With the tax now treated as a capital gain, the after‑tax return for investors improves, prompting a roughly 2% rally in those stocks.
Tourism, Jewellery & Medical Hubs: The Budget’s Bright Spots
Several non‑core sectors received a boost. The budget earmarks a Rs 40,000‑crore outlay for the jewellery industry and leaves customs duty on gold and silver untouched, keeping import costs steady. Consequently, leading jewellers saw share price appreciation.
Tourism also got a lift: the government plans to develop 15 heritage sites and cut the TCS rate on overseas tour packages from 5‑20% to a flat 2%. Easy Trip and peers surged as investors priced in higher outbound travel demand.
Health‑related tourism is another focal point. A commitment to build five medical‑tourism hubs will likely benefit hospital chains and ancillary services, creating a new growth avenue.
STT Surge on Futures & Options: Derivatives Pain Point
Perhaps the most market‑wrenching move was raising the Securities Transaction Tax (STT) on futures and options from 0.02% to 0.05%. For a Rs 1 lakh futures contract, the tax jumps from Rs 12.50 to Rs 20; an option contract’s tax rises from Rs 6.25 to Rs 10.
This uniform hike affects hedgers and speculators alike. Hedge‑fund analysts warn that higher hedging costs could deter prudent risk‑management trades, potentially increasing portfolio volatility. The immediate fallout was a sharp sell‑off in capital‑markets stocks: MCX fell 12%, Angel One and BSE each slipped over 8%.
Banking & Defence: Sectors Under Pressure
Public‑sector banks saw their shares tumble as the budget hinted at a high‑level committee to review mergers. Historically, bank consolidations create short‑term earnings drag while long‑term efficiencies accrue. The market’s nervousness reflects uncertainty over timing and execution.
Defence allocations, while up 21% YoY to Rs 5.94 lakh crore for FY27, fell short of analyst expectations. The modest increase failed to spark enthusiasm, leaving defence stocks in the red.
What History Teaches About Budget Shocks
India’s fiscal announcements have repeatedly moved markets. In 2022, a surprise increase in capital gains tax on equities caused a 2% index dip, only to recover when the government introduced a tax holiday for listed companies. The pattern suggests that short‑term volatility can be mitigated if the budget includes sector‑specific incentives that align with growth narratives.
Investors who understood the 2021 tax‑relief on small‑cap stocks were able to capture a 15% rally in those segments. The current budget’s mixed signals mean that selective positioning will be more rewarding than broad market bets.
Investor Playbook: Bull and Bear Scenarios
Bull Case
- Double‑down on IT and tech‑enabled services that benefit from the buyback tax change.
- Add exposure to tourism and jewellery stocks riding the fiscal incentives.
- Consider medical‑tourism and healthcare REITs as long‑term growth vehicles.
Bear Case
- Reduce exposure to derivatives‑intensive strategies; higher STT erodes alpha.
- Trim positions in capital‑markets brokers, PSU banks and defence firms pending clearer policy direction.
- Maintain a cash buffer to capitalize on potential rebounds if the market digests the cost‑increase narrative.
By aligning your portfolio with the sectors the budget genuinely favours—while guarding against the cost‑inflation in derivatives—you can turn today’s volatility into tomorrow’s opportunity.