ONGC, Oil India rally as royalty cut eases tax fears (2026)

Market snapshot: upstream PSU stocks jump

Oil & Natural Gas Corporation (ONGC) and Oil India rallied sharply in Tuesday’s trade after the government unexpectedly cut the royalty charged on crude oil and natural gas production. The move came at a time when rising crude prices had revived market speculation around a 2022-like windfall tax on upstream producers.

On the BSE, Oil India rose 9.24% to a day high of Rs 498.75. ONGC gained 6.74% to a day high of Rs 299.90. In another intraday snapshot cited in the reports, Oil India surged to Rs 490.85 (up about 7%) while ONGC climbed to Rs 295.45 (up about 5%) in an otherwise weak market.

What changed: government cuts royalty on crude and gas

The trigger for the rally was the Centre’s announcement on royalty rationalisation for India’s upstream sector. Union Minister of Petroleum and Natural Gas Hardeep Singh Puri said on X that the rationalisation under the ORD Act marks a new phase for India’s oil and gas regime, aimed at regulatory clarity by removing inconsistencies across frameworks.

The announcement follows what the minister described as the historic 2025 amendments to the ORD Act and PNG Rules. The revised schedule, as described, rationalises royalty rates and methodologies for crude oil, natural gas, and casing head condensate, with the stated objective of ensuring a stable and predictable framework aligned with investor expectations.

Why it mattered: windfall tax fears had weighed on valuations

Foreign brokerage CLSA said the “signal value” of the royalty cut was significant because it arrived amid rising crude prices and “difficult financial times for government finances.” According to CLSA, higher oil prices had fueled fears that the government could impose a windfall tax similar to 2022, and those fears had contributed to ONGC and Oil India being among the worst-performing global upstream and E&P stocks.

CLSA’s view was that cutting upstream tax instead of raising it should reduce speculation around a fresh windfall tax. The brokerage also said the action supports the government’s intention to promote exploration and production, and aligns with the promise under the new law passed last year not to impose new taxes on E&P.

CLSA’s valuation read-through for ONGC and Oil India

CLSA estimated the royalty change could add fair value of 7% to 9% for ONGC and 9% to 11% for Oil India. It also said that at $10 per barrel, ONGC could offer an “over-50% total return” because the stock is “pricing-in $15 a barrel Brent.”

The brokerage reiterated its “high conviction O-PF” stance on ONGC and said it finds ONGC pricing in $15/bbl versus Oil India at $10/bbl. CLSA added that at $10/bbl oil, ONGC has “43% upside plus” along with a “7% yield,” and cited a target price of Rs 405 for ONGC, implying 44.4% upside from Monday’s closing price.

The article also mentioned another target price reference: the brokerage retained a ‘Buy’ rating on ONGC with a target of Rs 332 per share. The reports did not provide additional context on why the two targets were cited.

How the royalty mechanics changed for nomination blocks

CLSA provided details on how royalty calculations were altered, particularly for nomination blocks which form a large share of current production for ONGC and Oil India.

Earlier, the existing royalty rate on crude oil from onshore blocks was 16.66% after subtracting a flat Rs 3,955 per tonne (about $1.7 a barrel). For offshore blocks, the royalty rate was 9.09% after subtracting Rs 2,226 per tonne (about $1.2).

CLSA said the new structure applies a standard ad-valorem deduction of 20%, and then applies royalty rates of 12.5% for onshore blocks and 10% for offshore blocks. This results in an effective cut in royalty on onshore crude production from 16.66% to 10%, and on offshore crude production from 9.09% to 8%.

For natural gas, applying the flat 20% deduction also reduces the royalty to 8% from 10% earlier, CLSA said.

GST-on-royalty dispute and the effective savings

CLSA added that, given the disputed GST on royalty, another 18% should be added to the reduction to calculate effective savings. The report did not quantify the rupee impact, but the point mattered for investors assessing the net benefit from the royalty changes.

This GST-linked element was also highlighted in the Hindi report, which said the GST-related savings can improve project economics and “18%” should be considered in the effective benefit calculation.

Extension beyond nomination blocks and Vedanta’s Rajasthan fields

The government also announced that the flat deduction will be 15% for blocks other than nomination blocks, CLSA said. As an example of the broader impact, the brokerage noted this change would reduce royalties for all of Vedanta’s Rajasthan field from 16.67% to 10.6%.

While Vedanta is not the focus of the stock move described for Tuesday, the example helped explain that the new royalty methodology affects multiple regimes and categories, not only the legacy nomination blocks.

Year-to-date performance: ONGC and Oil India vs the benchmark

The reports also cited relative performance in calendar year 2026. ONGC (up 24%) and Oil India (up 15%) were said to have outperformed the market, compared with an 11% decline in the benchmark index over the same period.

This context matters because it frames Tuesday’s rally as part of a broader 2026 outperformance trend for the two upstream PSUs, even as the broader market has been weaker.

Key facts at a glance

Royalty rate changes mentioned in the report

What investors are likely to track next

From a market perspective, the immediate driver was the policy signal that the government chose to lower upstream levies at a time when crude prices were rising, instead of tightening taxation. For ONGC and Oil India, investors will watch whether the royalty rationalisation translates into better cash flows and supports higher exploration and production activity, in line with the policy intent stated in the reports.

Another factor to monitor is how the disputed GST on royalty is treated in practice, since CLSA explicitly linked it to the effective savings calculation. And with CLSA framing valuation sensitivity around Brent assumptions ($15/bbl implied for ONGC versus $10/bbl cited for Oil India), crude price direction remains central to near-term sentiment.

Conclusion

ONGC and Oil India rallied up to 9% after the government cut crude and gas royalty rates, a move analysts said improves fair value and reduces windfall-tax concerns. The announcement, positioned as part of the post-2025 ORD Act framework, also aims to bring consistency and regulatory clarity to India’s upstream regime. Markets will now track implementation details, including the GST-on-royalty angle, and how investors continue to price crude assumptions against upstream earnings expectations.