SGBs Plunge 10% as Budget Overhauls Tax Exemption

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AuthorKavya Nair|Published at:
SGBs Plunge 10% as Budget Overhauls Tax Exemption
Overview

Indian Sovereign Gold Bonds (SGBs) experienced a sharp sell-off on Monday, February 2, 2026, with select maturities dropping by as much as 10%. This downturn followed Finance Minister Nirmala Sitharaman's Budget 2026 proposal to restrict capital gains tax exemption exclusively to original subscribers holding SGBs until maturity. The move, effective April 1, 2026, penalizes secondary market buyers. The broader market also reacted negatively to a significant hike in Securities Transaction Tax (STT) on equity derivatives, leading to substantial investor wealth erosion.

1. The SGB Sell-off

Sovereign Gold Bonds (SGBs) across various maturities witnessed a dramatic price decline on Monday, February 2, 2026. Several series saw drops of up to 10% on the National Stock Exchange (NSE), a direct consequence of the Union Budget 2026's revised tax treatment for these government securities. Specifically, SGBDEC26 plummeted by ₹1,760, approximately 10%, to ₹15,840, while SGBSEP31II fell by nearly 10% to ₹14,575.77. This market repricing underscores investor concerns over the removal of capital gains tax exemption for bonds acquired through secondary market transactions.

2. The STT Shockwave Hits Derivatives

Adding to market unease, the Budget 2026 introduced a significant increase in the Securities Transaction Tax (STT) on equity derivatives. The STT on futures contracts rose to 0.05% from 0.02%, and on options, it increased to 0.15% from 0.1% and 0.125%. This hike directly escalates trading costs, particularly for futures and options segments, which had seen a surge in activity. The immediate impact was substantial selling pressure during special trading sessions.

3. Broader Market Turmoil and Rebound

The combined effect of the SGB tax change and the STT hike triggered widespread market jitters. On Sunday, February 1, benchmark indices Sensex and Nifty slid by close to 2%, wiping out approximately ₹10 lakh crore in investor wealth. Brokerage firms and exchanges were particularly hard hit; stocks like Angel One and BSE Ltd saw drops exceeding 13% due to fears of reduced transaction volumes. While the market experienced a rebound on Monday, February 2, driven by value buying, the underlying sentiment remained cautious as investors processed the budget's implications.

4. Expert Perspectives and Fiscal Strategy

Market participants acknowledged the headwinds introduced by the budget proposals. Raamdeo Agrawal, Chairman and Co-founder of Motilal Oswal Financial Services, stated, "We must be realistic about the impact of STT on capital markets. The STT hike and the removal of dividend set-offs seem to be bringing a headwind to markets.". He noted that these changes could squeeze liquidity and leverage in the short term. However, Agrawal also highlighted that the long-term earnings outlook remains intact, supported by fiscal discipline and a strong capital expenditure push. The government's commitment to fiscal consolidation, targeting a deficit of 4.3% of GDP for FY27, and a record gross borrowing plan of ₹17.2 lakh crore, underpinned the budget's strategy. Analysts noted that the higher borrowing plan could put upward pressure on bond yields. The new SGB tax rule, effective April 1, 2026, aims to streamline tax benefits and encourage direct investment in gold via government channels. Grant Thornton's analysis pointed out the clarity provided on SGB tax exemptions, ensuring uniform application for bonds held until maturity.

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