Budget 2026: STT Hike Sparks Market Crash, Sensex Plunges 1547 Points

Introduction: A Budget Day Sell-Off

The Indian stock market witnessed a sharp decline during a special trading session on Sunday, February 1, 2026, immediately following the presentation of the Union Budget. Investor sentiment turned negative as the budget proposals failed to meet market expectations, leading to a broad-based sell-off. The BSE Sensex closed down 1546.84 points, or 1.88%, at 80,722.94, while the Nifty 50 fell 495.20 points, or 1.96%, to end at 24,825.45. The primary trigger for the downturn was an unexpected and steep increase in the Securities Transaction Tax (STT) on derivatives, which overshadowed several long-term positive announcements.

The STT Shock and Its Market Impact

The most significant factor contributing to the market crash was the government's decision to raise the STT on futures and options contracts. Finance Minister Nirmala Sitharaman proposed increasing the STT on futures to 0.05% from the existing 0.02%. For options, the STT on the premium was raised to 0.15% from 0.1%, and on the exercise of options, it was increased to 0.15% from 0.125%. This move makes derivatives trading more expensive, directly impacting high-frequency traders, arbitrageurs, and hedgers. The announcement led to a rapid unwinding of positions, causing a sharp intraday plunge. Stocks of brokerage firms and exchanges were hit particularly hard, with shares of BSE, Groww, and Angel One falling by as much as 13.5%.

Capital Expenditure Below Expectations

While the government continued its focus on infrastructure, the announced capital expenditure for fiscal year 2027 fell short of market forecasts. The budget allocated ₹12.2 lakh crore for capex, a 9% increase from the previous year's ₹11.2 lakh crore. However, analysts had anticipated a double-digit increase. BofA Securities, for instance, had estimated a capex of around ₹12.5 lakh crore, while Axis Direct had projected an allocation between ₹12 lakh crore and ₹13 lakh crore. This modest increase disappointed investors, leading to declines in infrastructure-related stocks like Larsen & Toubro, Adani Ports, and KEC International, which fell by up to 6%.

Key Tax and Investment Reforms

Beyond the STT hike, the budget introduced several other notable changes:

Share Buyback Taxation: The government proposed to tax proceeds from share buybacks as capital gains for all shareholders. This marks a shift from the previous regime where companies paid a buyback tax. To discourage misuse by promoters, an additional buyback tax will be levied on them, resulting in an effective tax of 22% for corporate promoters and 30% for non-corporate ones. The move was seen as a structural clean-up and was received positively by IT companies, with stocks like Wipro and TCS gaining around 2%.

Investment Norms for PROIs: In a bid to attract foreign investment, the government permitted Individual Persons Resident Outside India (PROI) to invest in listed Indian companies through the Portfolio Investment Scheme. The investment limit for an individual PROI was doubled from 5% to 10%, and the overall limit for all PROIs was raised to 24% from 10%.

Sovereign Gold Bonds (SGBs): The budget clarified that the exemption from capital gains tax on SGBs would only be available if an individual subscribes to them during the original issue and holds them until maturity. This exemption will now apply uniformly to all SGB issuances.

Sectoral Winners and Losers

The budget's announcements led to varied reactions across different sectors.

Sectors Under Pressure:

• Defence: Despite an 18% increase in capital outlay to ₹2.19 lakh crore, the allocation failed to meet industry expectations. The Nifty India Defence index ended with a sharp 5% cut, with stocks like Bharat Dynamics and Paras Defence being top losers.
• Realty: The absence of any significant announcements for the real estate sector disappointed investors, causing the Nifty Realty index to fall by 4.6% intraday before settling 2% lower.
• PSU Banks: The Nifty PSU Bank index plunged 5.6% amid concerns over potential mergers following the announcement of a high-level committee to review the banking sector.

Sectors Gaining Ground:

• Electronics and Semiconductors: The government increased the outlay for the Electronics Components Manufacturing Scheme to ₹40,000 crore and launched the 'India Semiconductor Mission 2.0'. This boosted stocks like Tata Elxsi and CG Power.
• Tourism: A proposal to reduce the Tax Collected at Source (TCS) on overseas tour packages from 5-20% to a flat 2% led to a rally in tourism stocks like Easy Trip Planners.
• Textiles: Plans to set up mega textile parks and modernize the sector provided a lift to textile stocks.

Market Data at a Glance

Analyst Commentary and Outlook

Market experts largely viewed the sharp fall as a knee-jerk reaction driven by the negative surprise on the STT front. Many analysts noted that the budget's focus on fiscal discipline and long-term structural reforms provides a stable macroeconomic framework. Manish Jain of Bajaj Broking stated that the budget was more about building confidence than driving short-term momentum. However, others, like Somil Mehta of Mirae Asset Sharekhan, pointed out that the STT hike increases trading costs and could hurt near-term confidence and liquidity, especially for foreign portfolio investors. The consensus suggests that while short-term volatility may persist, the market's focus will eventually shift back to corporate earnings and fundamental growth drivers.

Conclusion

Union Budget 2026 prioritized fiscal consolidation and structural reforms over populist measures or short-term market incentives. The unexpected hike in STT on derivatives was the primary catalyst for the significant market correction, overshadowing positive steps in manufacturing, infrastructure, and foreign investment. While the immediate reaction was negative, the budget lays a foundation for long-term stability. Investors will now closely watch how the increased transaction costs impact market volumes and whether the government's capex push translates into sustained economic growth.