Budget 2026 Market Crash: Sensex Drops 1,500 Points on STT Hike

Indian equity markets witnessed a sharp sell-off during a rare Sunday trading session on February 1, 2026. The volatility was triggered by the Union Budget announcements made by Finance Minister Nirmala Sitharaman. While the day began with a traditional ritual of curd and sugar, the market sentiment quickly turned sour as the details of the budget unfolded. The primary catalyst for the decline was the unexpected hike in the Securities Transaction Tax (STT) on derivatives trading, which caught many market participants off guard.

The benchmark BSE Sensex ended the day with a massive loss of 1,546.84 points, or 1.88 percent, closing at 80,722.94. Similarly, the NSE Nifty 50 plummeted by 495.20 points, or 1.96 percent, to settle at 24,825.45. During the intraday session, the Nifty even slipped below the 24,600 mark, reaching a low of 24,571.75 before a minor recovery toward the end of the day. The broader markets were not spared either, with midcap and smallcap indices underperforming the frontliners.

The Impact of Securities Transaction Tax Hike

The most significant blow to market sentiment came from the revision of STT rates for the Futures and Options (F&O) segment. The Finance Minister announced that the STT on futures trading would be increased from 0.02 percent to 0.05 percent. For the options segment, the tax on premiums and exercises was raised to 0.15 percent from the previous levels of 0.1 percent and 0.125 percent, respectively.

This move is seen as an attempt by the government to curb excessive speculation in the derivatives market, which has seen retail participation explode in recent years. However, the immediate reaction from the trading community was negative. Shares of market infrastructure institutions like BSE Limited and MCX felt the heat directly. BSE Limited shares dropped by 7 percent, while MCX shares plunged nearly 12 percent during the session, reflecting fears of reduced trading volumes due to higher transaction costs.

Sectoral Winners and Losers

The carnage was widespread across sectors, with the Nifty PSU Bank and Nifty Metal indices being the hardest hit. The PSU Bank index declined by 5.57 percent, led by heavy selling in State Bank of India and other state-owned lenders. The metal index shed 3.8 percent, continuing a downward trend fueled by global commodity price pressures. Hindalco Industries emerged as one of the biggest losers, falling over 5.6 percent.

On the other hand, the IT sector provided a silver lining. The Nifty IT index was the only sectoral index to end in the green, gaining 0.57 percent. Large-cap IT firms like TCS, Wipro, and Infosys saw buying interest as the government proposed a safe harbour margin of 15.5 percent for the sector and expanded the threshold from 300 crore to 2,000 crore. Healthcare also showed resilience, with Max Healthcare gaining over 2 percent.

Broader Market and Smallcap Underperformance

The pain was more acute in the broader market segments. The Nifty Midcap index fell by 2.2 percent, while the Nifty Smallcap index declined by 2.8 percent. This underperformance suggests that risk aversion was high among investors, who preferred to exit positions in high-beta stocks. Around 250 stocks touched their 52-week lows during the session, including prominent names like ITC, IRCTC, SBI Card, and Godrej Properties.

Investors were also disappointed by the lack of relief in the Long-Term Capital Gains (LTCG) tax. There were high expectations for a reduction or a change in the holding period, but the status quo remained. This lack of positive news on the personal taxation front for equity investors added to the selling pressure.

Market Performance Summary Table

Key Stock Highlights and 52-Week Lows

While the overall market was in the red, a few stocks managed to buck the trend due to specific budget announcements. Paytm shares added 5 percent following a boost in the UPI Scheme-Linked Incentive. Easy Trip Planners also jumped 2 percent after the budget provided a boost to the tourism sector. Conversely, stocks like ONGC, Adani Ports, and Bharat Electronics were among the top losers in the Nifty 50 pack.

The list of stocks hitting 52-week lows was extensive, indicating a broad-based correction. Companies like Clean Science, KPIT Technologies, and Exide Industries saw significant selling. This trend reflects a shift in investor preference toward defensive sectors or cash, as the cost of trading and the tax burden on capital gains remain high.

Taxation Changes Beyond STT

The budget also introduced changes to buyback taxation. Under the new rules, buybacks will be taxed as capital gains for all shareholders. Furthermore, promoters will face a higher effective tax rate to discourage tax arbitrage. Specifically, corporate entities will be taxed at 22 percent, while non-corporate entities will face a 30 percent tax rate on buybacks.

For Non-Resident Indians (NRIs), the budget brought some relief as the investment limit was doubled to 10 percent. Additionally, the Tax Collected at Source (TCS) on overseas tours and education was reduced, which is expected to benefit the travel and education sectors in the long run. However, these positive measures were overshadowed by the immediate impact of the STT hike.

Analysis of Investor Sentiment

The market's reaction highlights the sensitivity of Indian investors to transaction costs and capital gains taxation. With Foreign Institutional Investors (FIIs) already pulling out funds due to global jitters and high valuations, the domestic market was looking for a catalyst to move higher. Instead, the increase in STT acted as a deterrent for high-frequency traders and retail participants who drive liquidity in the F&O segment.

The volatility was also exacerbated by global factors. Jitters from the US markets and concerns over international trade policies have kept investors on edge. The India VIX, a measure of market volatility, surged during the session, reflecting the heightened uncertainty.

Conclusion

The Union Budget 2026 has left the Indian stock market in a state of caution. The hike in STT and the absence of LTCG relief have dampened the spirits of the trading community. While the IT and Healthcare sectors showed some strength, the overall trend remains weak. Investors will now look toward corporate earnings and global cues to determine the next direction for the market. The coming weeks will be crucial to see if the Nifty can sustain its support levels or if further correction is in store.