The broader NSE index was down 0.72% at 11,475.05 as of 0500 GMT, while the benchmark BSE index was trading 0.59% lower at 38,483.71.
The government's proposal to increase the public float by 10%, a surcharge on foreign portfolio investors (FPIs) and a 20% tax on buyback of securities in the annual budget on Friday dealt a heavy blow on the stock markets on Monday.
Finance Minister Nirmala Sitharaman raised the income tax surcharge on people with an annual income of more than 20 million rupees ($290,994) leading to a sharp selloff in the stock markets led by foreign portfolio investors, who may end up paying higher tax on their income due to the new rules.
"The provisions made in the budget lacked immediate boost to consumption and the provision for increase in effective tax rate is also a dampener," said Deepak Jasani, Head of Retail Research at HDFC Securities.
"FPI inflows may get postponed as chances of aggressive rate cut by U.S. Fed have faded, the money that was expected to flow into emerging markets due to low interest rates abroad gets delayed."
Foreign investors have net sold $451 million in Indian equities so far this month.
Asian stocks struggled to rebound on Tuesday after solid gains in U.S. jobs for June sharply reduced expectations that the Federal Reserve will deliver a large interest rate cut at the end of July.
Globally, investors' focus also shifted to Fed Chairman Jerome Powell's testimony before Congress later in the week for clues on monetary policy.
The Indian rupee weakened as much as 0.28% to 68.845 per dollar compared to Monday's close of 68.655.
The NSE IT index was trading down 0.55%. Shares of IT services firm Tata Consultancy Services Ltd fell as much as 1.6%. The Mumbai-based firm is due to post first-quarter results later in the day.
Titan Company Ltd fell as much as 10.9% to its lowest in eight weeks, after the watch and jewellery maker said revenue from its jewellery segment grew by a muted 13% in the first quarter as consumer demand in June was hit by a sharp increase in gold prices.