India’s retail investors—now a dominant force in equity markets—are increasingly voicing concerns over rising taxes, high transaction costs, and regulatory hurdles, even as their role in stabilizing markets grows. 12 to 12.2 crore (120–122 million) unique investors in India’s stock market and Total trading/demat accounts: 24 crore (240 million).
With foreign portfolio investors (FPIs) continuing to offload equities in recent months, retail investors have emerged as a key counterbalance. They now account for nearly 20 percent of total market capitalisation and about half of trading volumes on the National Stock Exchange (NSE), according to market estimates.
However, recent policy measures, including those in Union Budget 2026, have drawn criticism for adding to the financial burden on small investors rather than easing it.
Market participants point to the taxation framework as a key concern. Long-Term Capital Gains (LTCG) tax, reintroduced at 10 percent and later increased to 12.5 percent, along with Short-Term Capital Gains (STCG) tax at 20 percent, has eroded post-tax returns. Dividend income, now taxed at applicable income slab rates, has further impacted conservative investors, particularly retirees dependent on steady income from dividend-yielding stocks.
“Retail investors have become central to market stability, yet policy support has not kept pace,” said a market expert.
Costs and Compliance Pressures
Investors are also grappling with high transaction costs. A typical equity trade attracts multiple levies—Securities Transaction Tax (STT), GST, exchange transaction charges, and regulatory fees—which together often exceed brokerage costs.
Analysts note that such costs are relatively high compared to global markets and could deter broader participation. This comes at a time when investment cycles are shortening due to rapid changes across sectors, forcing investors to rebalance portfolios more frequently and incur higher cumulative costs.
The continued coexistence of STT and capital gains tax has also raised concerns. STT, introduced in 2004 as a simplified alternative to capital gains tax, now operates alongside it, effectively increasing the overall tax burden.
Low Equity Exposure, High Taxation
India’s household exposure to equities remains modest at around 14 percent, significantly lower than in developed markets such as the United States. Experts argue that policy should encourage wider participation rather than impose higher taxes, which could limit long-term market growth.
Derivatives Curbs Debate
Efforts to curb speculative activity in the derivatives segment through higher taxes on Futures and Options (F&O) trades have also been questioned. Market observers say taxation alone may not be sufficient to address speculation.
Suggested alternatives include tighter eligibility norms, higher lot sizes, and mandatory investor education or certification before allowing access to complex derivative instruments.
Illiquid Stocks and Tax Gaps
Retail investors, who often invest in micro- and small-cap stocks, face additional risks when such stocks become illiquid or are delisted. In such cases, investors are left holding shares that have little or no value.
Under current tax rules, losses can only be recognized upon an actual sale, preventing investors from offsetting such losses against taxable gains. Experts have called for changes to allow write-offs in cases where stocks remain non-tradable for extended periods.
Demand for Greater Flexibility
Investors have also flagged the mandatory use of the First-In-First-Out (FIFO) method for calculating capital gains, which can lead to higher tax outgo in rising markets. Allowing the “Specific Identification” method could offer better tax efficiency and flexibility, particularly during financial emergencies.
Surveillance Measures Under Lens
Regulatory actions such as Enhanced Surveillance Measures (ESM) and Additional Surveillance Measures (ASM), imposed on stocks witnessing sharp price movements, have also come under scrutiny. While aimed at curbing manipulation, these measures often result in a sharp drop in liquidity, limiting exit options for investors.
Market participants suggest that regulators could deploy advanced analytics and artificial intelligence tools to identify and act against manipulators directly, rather than imposing broad-based restrictions.
Call for Policy Reset
With retail participation rising steadily, experts say there is a need for a more balanced policy framework that reduces costs, rationalises taxes, and improves ease of participation.
Such measures, they argue, would not only benefit investors but also deepen India’s capital markets and support long-term economic growth.
The author is retired as Professor from the University of Delhi in 2024. He is an alumnus of IIM Indore and holds a PhD from the Delhi School of Economics. An investor activist and former member of various SEBI committees. He taught Capital Markets and Investment Banking at leading business schools of India.
