Budget 2026: STT Hiked on F&O, Making Trading Costlier

Introduction

In a significant move impacting the Indian stock market, Union Finance Minister Nirmala Sitharaman, during the presentation of the Union Budget for 2026-27 on February 1, 2026, announced a steep hike in the Securities Transaction Tax (STT) on futures and options (F&O) trades. This decision is aimed at curbing the rising tide of speculative activity in the derivatives market and is expected to make trading more expensive for market participants, particularly high-frequency traders. The new tax rates are anticipated to come into effect from April 1, 2026.

A Closer Look at the New STT Rates

The budget proposal outlines a substantial increase across the board for derivatives trading. The government has more than doubled the tax on futures contracts and significantly raised it for options. This move tightens the regulatory grip on a market segment that has seen explosive growth in retail participation over the last few years.

Here is a breakdown of the proposed changes:

Calculating the Impact on Traders

The direct consequence of this tax hike is an increase in transaction costs, which will eat into the profits of traders. For those operating on thin margins, such as scalpers, achieving break-even will become more challenging.

To understand the real-world impact, consider these examples:

• Futures Trading: On a Nifty futures lot valued at ₹2,00,000, a trader previously paid an STT of ₹40 (at 0.02%). Under the new regime, the same transaction will attract an STT of ₹100 (at 0.05%), an additional cost of ₹60 per lot.

• Options Trading: For an options contract with a premium value of ₹10,000, the STT was ₹10 (at 0.1%). This will now increase to ₹15 (at 0.15%). While the absolute increase of ₹5 per lot seems small, for traders executing hundreds of such trades daily, the cumulative cost will be substantial.

Government's Rationale: Curbing Speculation

The government and market regulator SEBI have repeatedly expressed concerns about the high level of speculative activity in the F&O segment, especially among retail investors. A recent SEBI study highlighted that nine out of ten individual traders in the F&O market end up losing money. The ease of access through mobile trading apps and the allure of high leverage have drawn many inexperienced investors into high-risk derivatives.

By increasing the cost of trading, the government aims to discourage excessive, short-term speculative bets and encourage a shift towards the cash market and long-term investment. The move is seen as a step towards ensuring financial stability and protecting retail investors from significant losses.

Markets React Sharply to Announcement

The stock market registered a sharp negative reaction immediately following the announcement. The news triggered a broad-based sell-off, particularly in stocks linked to capital markets.

By midday, the Nifty 50 had fallen by approximately 1.79%, and the Sensex was down by 1.54%. Brokerage and exchange-related stocks were hit the hardest, as higher taxes are expected to reduce trading volumes and impact their revenues.

Changes to Share Buyback Taxation

Beyond the STT hike, the budget introduced another key change for investors. The government has altered the taxation rules for share buybacks. Previously, a tax was levied on the company conducting the buyback. Now, any profit made by a shareholder from tendering shares in a buyback will be treated as 'capital gains' and taxed in the hands of the shareholder. This change aims to create a more transparent tax structure and align the treatment of buybacks with other capital market transactions.

Expert Commentary on the Move

Market experts and veteran investors have had a mixed but largely understanding reaction to the STT hike. Veteran investor Shankar Sharma described derivatives as “poison x cocaine” for young traders, supporting the tax increase as a necessary measure to curb risky behavior. Similarly, Shripal Shah, MD and CEO of Kotak Securities, noted that the government's intent appears to be “volume moderation rather than revenue maximisation.” The consensus is that while the move will cool down the overheated derivatives market, its long-term impact on market depth and liquidity remains to be seen.

Conclusion

The Union Budget 2026 has sent a clear signal to the market: the era of unchecked speculative trading in derivatives is facing stricter oversight. By raising the STT, the government aims to rebalance the market, pushing participants towards more stable, long-term investment strategies. While traders will face higher costs, policymakers view this as a necessary step to safeguard the financial ecosystem and protect retail investors from potential ruin.