Budget 2026: STT Hike on F&O Trading Jolts Markets

Introduction

Finance Minister Nirmala Sitharaman, presenting the Union Budget 2026, announced a significant increase in the Securities Transaction Tax (STT) on derivatives trading. The move, aimed at curbing excessive speculation in the futures and options (F&O) segment, sent immediate shockwaves through the stock market, triggering a sharp sell-off in benchmark indices and brokerage stocks.

Details of the STT Revision

The budget proposal outlines a substantial hike in the tax levied on F&O transactions. For futures contracts, the STT has been raised to 0.05% from the previous 0.02%. For options trading, the STT on the premium has been increased to 0.15% from 0.1%, while the tax on options exercise was also aligned at 0.15%. This revision increases the cost of trading for all participants in the derivatives market.

Curbing Speculation: The Government's Stance

The government's decision is a direct response to the explosive growth in derivatives trading, particularly among retail investors. Regulators, including the Securities and Exchange Board of India (SEBI), have repeatedly expressed concerns about high levels of speculative activity. A recent SEBI study highlighted the risks, revealing that approximately 93% of individual traders in the equity F&O segment incur net losses. The STT hike is intended to act as a disincentive for high-frequency and speculative trades, promoting greater market stability.

Immediate Market Reaction

The announcement had an immediate and severe impact on the stock market. Following the finance minister's speech, the BSE Sensex plummeted by over 800 points, and the Nifty 50 fell sharply. The pain was most acute for stocks related to the capital markets. Shares of BSE Ltd tanked by as much as 14%, while brokerage firms like Angel One and Nuvama saw their stock prices drop by around 10%. This reaction reflects investor fears that higher transaction costs will lead to a reduction in trading volumes, directly affecting the revenues of exchanges and brokerage houses.

Industry Experts Weigh In

Market analysts offered varied perspectives on the move. Shripal Shah, MD and CEO of Kotak Securities, described the increase as "steep," noting that it would raise impact costs for traders, hedgers, and arbitrageurs. He suggested the primary intent appears to be "volume moderation rather than revenue maximisation," as lower derivative volumes could offset potential tax gains.

Divam Sharma, Co-founder of Green Portfolio PMS, viewed the hike as a signal of closer regulatory monitoring. He believes the increase is "relatively modest" and is unlikely to fundamentally alter brokerage business models, as liquidity in the derivatives market remains strong.

Rajarshi Dasgupta, Executive Director at AQUILAW, echoed this sentiment, stating the move targets speculative excesses. He pointed out that while long-term investors will see minimal impact, short-term and high-frequency trading volumes could decline. The key challenge, he noted, will be to maintain a balance that does not harm market liquidity.

Historical Context and Lingering Concerns

STT was first introduced on October 1, 2004, as a measure to simplify tax collection and was intended to replace the long-term capital gains (LTCG) tax. However, the reintroduction of LTCG tax in 2018, while STT remained in place, has been a point of contention for market participants. Zerodha co-founder Nithin Kamath has previously highlighted that the cumulative tax burden has significantly increased for investors. He also noted that STT collections for the current fiscal year were already tracking about 25% below projections, suggesting that previous tax hikes may have already started to dampen trading activity.

Parallel Changes in Buyback Taxation

Alongside the STT hike, the budget also introduced significant changes to the taxation of share buybacks. In a move welcomed by many, buyback proceeds for minority shareholders will now be treated as capital gains instead of dividends. This change could result in a lower tax liability for individual investors. However, to prevent misuse, the government has proposed an additional buyback tax on promoters. Corporate promoters will face an effective tax of 22%, while non-corporate promoters will be taxed at 30% on buyback gains.

Implications for Traders and the Broader Market

The direct consequence of the STT hike is an increase in transaction costs for all F&O traders. This will be felt most by high-frequency traders and arbitrageurs whose strategies rely on thin margins. The increased cost may lead some participants to reduce their activity, potentially leading to a reduction in overall market liquidity. The move reinforces the government's and SEBI's focus on guiding the market away from excessive speculation and towards more stable, long-term investment.

Conclusion

The Union Budget 2026 has sent a clear message to the derivatives market: the era of unchecked speculative growth is facing increased scrutiny. By raising the STT on futures and options, the government aims to moderate trading volumes and protect retail investors. While the long-term effects on market depth and liquidity remain to be seen, the immediate market downturn indicates that the path ahead for high-frequency traders may be challenging. The parallel reform in buyback taxation, however, provides some relief to minority shareholders, showcasing a balanced approach to capital market regulation.