Budget 2026: STT Hike Sparks Market Crash, Sensex Plummets 1000 Points

A Budget Day Shock for Dalal Street

The Indian equity markets experienced a sharp and immediate downturn during a special trading session on Sunday, February 1, 2026. The sell-off was triggered by Finance Minister Nirmala Sitharaman's Union Budget 2026 speech, specifically the announcement of a significant increase in the Securities Transaction Tax (STT) on futures and options (F&O) trades. The reaction from investors was swift, erasing early optimism and sending benchmark indices tumbling. The BSE Sensex plunged over 1,000 points to trade at 81,221.97, while the Nifty 50 index fell by more than 367 points, slipping to 24,953.05. The market capitalization of all companies listed on the BSE saw a significant erosion of approximately ₹6 lakh crore, reflecting the widespread negative sentiment.

The STT Hike Explained

Securities Transaction Tax is a direct tax levied on the value of securities transacted through a stock exchange. It is charged on every buy and sell transaction, impacting traders, hedgers, and arbitrageurs by directly increasing the cost of trading. In the Union Budget 2026, the government proposed a substantial hike in STT rates for the derivatives segment. The tax on futures contracts was more than doubled, rising from 0.02% to 0.05%. For options contracts, the STT on the premium was increased from 0.1% to 0.15%, and the levy on the exercise of options was also raised to 0.15%. This move is widely seen as an attempt by the government to moderate speculative activity in the derivatives market, which has seen rapid growth in recent years.

Markets React with a Broad-Based Sell-Off

The market's response to the STT hike was immediate and severe. The announcement, coming at a time of existing market volatility, amplified investor anxiety and led to a broad-based sell-off. The decline was not limited to frontline indices; broader markets also felt the pressure. The Nifty Midcap 100 index fell by 2.7%, and the Nifty Smallcap 100 index registered a steeper decline of 3.4%. The India VIX, which measures market volatility, also spiked, indicating heightened uncertainty among market participants. The selling pressure was visible across most sectors, with PSU Bank and Metal indices falling over 3%, though IT stocks showed some resilience.

Brokerage and Exchange Stocks Under Pressure

Stocks of companies whose revenues are directly linked to market trading volumes were the hardest hit. Shares of exchange operator BSE Ltd. and brokerage firms like Angel One and Groww's parent company, Billionbrains Garage Ventures, plunged by as much as 13.5% during intraday trading. Investors fear that the increased transaction costs will deter frequent trading, particularly by retail participants and high-frequency traders who operate on thin margins. A potential reduction in trading volumes could directly impact the earnings of these market infrastructure companies, leading to a sharp correction in their stock prices.

Key STT Rate Changes in Budget 2026

To provide a clear picture of the revisions, the following table summarizes the changes in STT rates for derivatives as proposed in the budget:

Expert Concerns on Trading Volumes and Revenue

Market experts and industry leaders expressed concerns about the potential consequences of the STT hike. Shripal Shah, CEO of Kotak Securities, noted that the steep increase would raise impact costs for traders and could lead to a cooling of derivative activity and a reduction in volumes. He suggested the government's intent might be to moderate trading rather than maximize revenue. This view is echoed by others who argue that higher tax rates could be counterproductive. Zerodha co-founder Nithin Kamath has previously highlighted that rising STT could lead to lower overall tax collections if trading volumes decline significantly, pointing to a shortfall in STT collections in the previous fiscal year as potential evidence.

Historical Context of STT in India

STT was first introduced in India 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 government reintroduced LTCG tax in 2018 while retaining STT, leading to concerns about a form of double taxation on equity investments. Ahead of the Budget 2026, many market participants had hoped for a reduction in STT, especially on cash market trades, to improve liquidity. The government's decision to increase the tax, particularly on the F&O segment, ran contrary to these expectations.

Outlook for Traders and Investors

The immediate aftermath of the budget announcement has left the market on uncertain footing. The higher cost of trading is a new reality that traders and investors must now factor into their strategies. While the long-term economic outlook may remain intact, the near-term sentiment is likely to be cautious as the market digests the full impact of these tax changes. The focus will now shift to how trading volumes evolve in the coming weeks and whether the government's move successfully curbs speculative frenzy without significantly harming market liquidity and participation.