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2 Feb 2026·Source: The Indian Express

4 min

EconomyNEWS

Budget 2026-27: Customs Duty Reductions to Boost Local Manufacturing

Customs duty cuts aim to spur production and curb speculative retail trades.

Photo by Conny Schneider

Finance Minister Nirmala Sitharaman, along with six secretaries, addressed a press conference on 02 February 2026, after presenting the Budget for 2026-27. They discussed hiking the Securities Transaction Tax (STT) to curb speculative retail trades. The government aims to discourage speculative tendencies by increasing the STT on trading of Future and Options (F&O) contracts. The customs duty cuts are intended to enhance manufacturing, value addition, and aid exporters. The buyback proceeds will be taxed as capital gains at 12.5% for long-term gains for minority shareholders. The promoters will pay additional buyback tax. The fiscal deficit for the next financial year is projected at 4.3%. The government plans a strong asset monetisation plan, expecting to generate Rs 80,000 crore from miscellaneous capital receipts. A high-level committee will examine the banking sector to plan for banking in 2047, focusing on expanding the banking network and improving procedures.

Key Facts

STT hike: To curb speculative retail trades

Fiscal deficit target: 4.3% for next FY

Asset monetisation target: Rs 80,000 crore

UPSC Exam Angles

GS Paper 3 (Economy): Fiscal policy, taxation, investment models

Connects to syllabus topics like government budgeting, Indian economy, infrastructure

Potential question types: Statement-based, analytical, current affairs

Visual Insights

Key Economic Indicators - Budget 2026-27

Highlights of the Budget 2026-27 related to fiscal deficit, buyback tax, and asset monetization.

Fiscal Deficit: 4.3%
Buyback Tax (Long-Term Capital Gains for Minority Shareholders): 12.5%
Asset Monetization Target: ₹80,000 crore

More Information

Background

The Securities Transaction Tax (STT) is a tax levied on the purchase and sale of securities listed on stock exchanges. It was introduced in India in 2004 to broaden the tax base and reduce tax evasion in securities transactions. Before STT, capital gains tax was the primary means of taxing profits from securities trading. The introduction of STT aimed to simplify the tax structure and make it more efficient. The fiscal deficit represents the difference between the government's total expenditure and its total revenue (excluding borrowings). Managing the fiscal deficit is a key aspect of fiscal policy. The Fiscal Responsibility and Budget Management (FRBM) Act was enacted in 2003 to set targets for reducing the fiscal deficit and promoting fiscal discipline. The FRBM Act has been amended several times to adapt to changing economic conditions and government priorities. Customs duties are taxes imposed on goods when they are transported across international borders. These duties serve multiple purposes, including protecting domestic industries, generating revenue for the government, and regulating trade. The structure and rates of customs duties are governed by the Customs Act, 1962 and are subject to periodic revisions based on government policy and international trade agreements. Changes in customs duties can significantly impact domestic manufacturing, exports, and overall economic activity.

Latest Developments

The government's focus on asset monetization aligns with recent efforts to boost infrastructure development and reduce the fiscal burden. The National Monetization Pipeline (NMP), launched in 2021, aims to unlock value from underutilized public assets across various sectors. This initiative is expected to generate significant revenue for reinvestment in infrastructure projects. The success of asset monetization depends on efficient execution, transparent processes, and attracting private sector participation. The proposal to form a high-level committee to examine the banking sector reflects ongoing concerns about the long-term sustainability and competitiveness of Indian banks. Recent developments in financial technology and the increasing importance of digital banking necessitate a comprehensive review of the regulatory framework and operational practices. The committee's recommendations will likely influence the future structure and functioning of the banking sector, including issues related to Non-Performing Assets (NPAs) and financial inclusion. The increase in Securities Transaction Tax (STT) on F&O contracts is part of a broader effort to discourage speculative trading and promote long-term investment in the stock market. This measure is intended to reduce market volatility and protect retail investors from excessive risk. However, some market participants argue that higher STT rates could reduce trading volumes and liquidity, potentially impacting market efficiency.

Frequently Asked Questions

1. What are the key facts about the Budget 2026-27 that are important for the UPSC Prelims exam?

For UPSC Prelims, remember these key facts: The government aims to curb speculative retail trades by hiking the Securities Transaction Tax (STT). The fiscal deficit target for the next financial year is 4.3%. The asset monetisation target is Rs 80,000 crore.

Exam Tip

Focus on memorizing the percentages and amounts related to fiscal deficit and asset monetisation. These are frequently asked in prelims.

2. What is Securities Transaction Tax (STT), and why is the government increasing it?

Securities Transaction Tax (STT) is a tax levied on the purchase and sale of securities listed on stock exchanges. The government is increasing the STT on trading of Future and Options (F&O) contracts to discourage speculative retail trades.

Exam Tip

Understand the purpose of STT and how it affects market behavior. This is important for both Prelims and Mains.

3. How does the government's focus on asset monetisation relate to the National Monetization Pipeline (NMP)?

The government's focus on asset monetisation aligns with the National Monetization Pipeline (NMP), launched in 2021. The NMP aims to unlock value from underutilized public assets across various sectors to generate revenue for reinvestment in infrastructure projects.

Exam Tip

Understand the objectives and impact of NMP. Questions on infrastructure development and related government initiatives are common.

4. What is the projected fiscal deficit for the next financial year, and why is it important?

The projected fiscal deficit for the next financial year is 4.3%. It is important because it indicates the government's borrowing requirements and its ability to manage its finances effectively. A lower fiscal deficit generally indicates better fiscal health.

Exam Tip

Relate the fiscal deficit target to overall economic stability and government policies. Understand the implications of a high vs. low deficit.

5. How will the customs duty reductions impact local manufacturing and exporters?

The customs duty cuts are intended to enhance manufacturing, value addition, and aid exporters. By reducing the cost of imported inputs, local manufacturers can become more competitive, and exporters can offer their products at more attractive prices in the global market.

Exam Tip

Consider the impact of such policy changes on different sectors of the economy. This is a common theme in Mains questions.

6. What are the pros and cons of hiking the Securities Transaction Tax (STT) to curb speculative retail trades?

Pros: Discourages excessive speculation, potentially stabilizing markets. Cons: May reduce trading volumes and liquidity, and could increase the cost of trading for genuine investors.

Exam Tip

For interview, be prepared to discuss both sides of the argument and offer a balanced perspective.

7. What is the tax rate on buyback proceeds for minority shareholders, and how does it differ for promoters?

The buyback proceeds will be taxed as capital gains at 12.5% for long-term gains for minority shareholders. The promoters will pay additional buyback tax.

Exam Tip

Pay attention to specific tax rates mentioned in the budget. These are often asked in the Prelims exam.

8. Why is the Budget 2026-27 focusing on boosting local manufacturing?

The focus on boosting local manufacturing is aimed at enhancing value addition within the country, creating employment opportunities, and reducing dependence on imports, ultimately contributing to economic growth and self-reliance.

Exam Tip

Relate this to the broader 'Make in India' initiative and the government's vision for economic development.

9. What are the potential challenges in achieving the asset monetisation target of Rs 80,000 crore?

Potential challenges include identifying suitable assets, attracting private sector investment, addressing regulatory hurdles, and ensuring efficient execution of monetisation plans.

Exam Tip

Consider the practical difficulties in implementing government policies, which is a common theme in Mains questions.

10. What are the recent developments related to the Securities Transaction Tax (STT) mentioned in the news?

The recent development is the government's plan to hike the Securities Transaction Tax (STT) on trading of Future and Options (F&O) contracts to curb speculative retail trades, as announced in the Budget 2026-27.

Exam Tip

Stay updated on any further announcements or clarifications related to STT changes.

Practice Questions (MCQs)

1. Consider the following statements regarding the Securities Transaction Tax (STT): 1. STT is levied only on the sale of securities listed on stock exchanges. 2. The primary objective of introducing STT was to broaden the tax base and reduce tax evasion. 3. An increase in STT on Future and Options (F&O) contracts aims to discourage speculative trading. Which of the statements given above is/are correct?

A.1 and 2 only
B.2 and 3 only
C.1 and 3 only
D.1, 2 and 3

Show Answer

Answer: B

Statement 1 is INCORRECT: STT is levied on both the purchase and sale of securities listed on stock exchanges, not just the sale. Statement 2 is CORRECT: The introduction of STT in 2004 aimed to broaden the tax base and reduce tax evasion in securities transactions. Statement 3 is CORRECT: According to the news summary, the government aims to discourage speculative tendencies by increasing the STT on trading of Future and Options (F&O) contracts.

2. As per the Budget 2026-27, what is the projected fiscal deficit for the next financial year?

A.3.5%
B.4.0%
C.4.3%
D.4.8%

Show Answer

Answer: C

According to the news summary, the fiscal deficit for the next financial year is projected at 4.3%. Options A, B, and D are incorrect as they do not match the figure mentioned in the source.

3. Which of the following is the primary objective of customs duty reductions as stated in the Budget 2026-27?

A.To increase government revenue
B.To enhance manufacturing, value addition, and aid exporters
C.To discourage foreign investment
D.To promote consumption of imported goods

Show Answer

Answer: B

According to the news summary, the customs duty cuts are intended to enhance manufacturing, value addition, and aid exporters. Options A, C, and D are incorrect as they contradict the stated objective.

4. Consider the following statements regarding the government's plans for the banking sector as outlined in the Budget 2026-27: 1. A high-level committee will be formed to examine the banking sector and plan for banking in 2047. 2. The committee's focus will be on expanding the banking network and improving procedures. 3. The government expects to generate Rs 1,00,000 crore from miscellaneous capital receipts. Which of the statements given above is/are correct?

A.1 and 2 only
B.2 and 3 only
C.1 and 3 only
D.1, 2 and 3

Show Answer

Answer: A

Statements 1 and 2 are CORRECT: The news summary mentions that a high-level committee will examine the banking sector to plan for banking in 2047, focusing on expanding the banking network and improving procedures. Statement 3 is INCORRECT: The government expects to generate Rs 80,000 crore (not Rs 1,00,000 crore) from miscellaneous capital receipts.