Budget 2026 STT Hike Wipes Out ₹6.5 Lakh Crore from Market

Introduction: A Budget Day Sell-Off

The Indian stock market experienced a severe downturn during a special weekend trading session on Sunday, February 1, 2026, immediately following the presentation of the Union Budget. Finance Minister Nirmala Sitharaman's proposal to significantly increase the Securities Transaction Tax (STT) on futures and options contracts triggered a widespread sell-off. The benchmark indices, BSE Sensex and NSE Nifty 50, plunged over 1%, wiping out more than ₹6.5 lakh crore from investor wealth and sending a wave of concern through Dalal Street.

The Trigger: A Steep Hike in Transaction Taxes

The primary catalyst for the market crash was the proposed revision of STT rates for the derivatives segment. In her budget speech, the Finance Minister announced a substantial increase in the tax levy on F&O trades. Under the new proposal, the STT on futures contracts is set to more than double, rising from 0.02% to 0.05%. Similarly, the tax on options premiums will increase from 0.10% to 0.15%, and the levy on options exercised will also climb from 0.125% to 0.15%. This move directly increases the cost of trading for all participants in the derivatives market, a segment that has seen exponential growth in recent years and has become a major revenue source for brokers and exchanges.

Market Carnage in Numbers

The reaction from the market was swift and brutal. The BSE Sensex plummeted by over 1,000 points, at one point touching a low of 81,218. The NSE Nifty 50 fell below the crucial 25,000 mark, dropping around 348 points to 24,973. The sharp decline led to a significant erosion in market capitalization. The total market cap of all companies listed on the BSE fell by ₹6.58 lakh crore, from ₹460.02 lakh crore in the previous session to ₹453.43 lakh crore. The negative sentiment was broad-based, with 2,167 stocks declining on the BSE, while only 1,391 advanced. Adding to the bearish mood, as many as 200 stocks hit their 52-week lows.

Key Budget 2026 STT Proposals

Brokerages and Exchanges Bear the Brunt

Stocks of brokerage firms and stock exchanges were at the epicenter of the sell-off, as their business models are directly linked to trading volumes. Shares of BSE Ltd, Angel One, and Groww's parent company, Billionbrains Garage Ventures, fell by as much as 13.5%. Investors fear that the higher transaction costs will deter active traders, particularly high-frequency traders and arbitrageurs, leading to a significant reduction in derivatives volumes. This could, in turn, adversely impact the earnings of these companies, which have benefited immensely from the recent surge in retail participation in the F&O segment.

Expert Analysis: A Move to Curb Speculation

Market analysts and industry leaders interpreted the STT hike as a deliberate move by the government to moderate speculative activity rather than a pure revenue-generation exercise. Shripal Shah, MD & CEO of Kotak Securities, noted that the steep increase would raise impact costs for traders and could cool derivative activity. He suggested that any potential revenue gain for the government might be offset by the resulting lower volumes. Similarly, Aakash Shah of Choice Equity Broking highlighted that the hike was a 'meaningful jump, not a marginal tweak,' which would have a direct dampening effect on F&O volumes, especially among cost-sensitive traders.

Historical Context of Budget Day Reactions

Budget Day has historically been a volatile event for the Indian markets, with mixed outcomes over the past decade. While the market has often reacted sharply to specific proposals, the long-term trend is typically dictated by broader economic fundamentals. For instance, the market saw its steepest Budget Day fall in over a decade in 2020 after a lack of relief measures, with the Sensex plunging 2.43%. In contrast, Budget 2021 triggered a massive 5% rally, the best in two decades, on the back of pro-growth announcements and no changes to capital gains tax. The reaction to the 2026 Budget is one of the most severe negative responses in recent history, primarily due to a direct hit on the high-volume derivatives trading ecosystem.

Looking Ahead: The Path Forward

The immediate focus for the market will be on assessing the tangible impact of the STT hike on trading volumes in the coming weeks and months. While the budget contained other proposals, including a capital expenditure target of ₹12.2 lakh crore for FY27, the negative sentiment from the STT announcement overshadowed everything else. Investors and traders will now recalibrate their strategies to account for the higher transaction costs. The market's direction will likely depend on whether participants absorb the higher costs or if trading activity shifts away from the derivatives segment, potentially impacting overall market liquidity and depth.

Conclusion

The Union Budget 2026 has delivered a significant jolt to the stock market, with the hike in Securities Transaction Tax acting as the primary catalyst for a sharp correction. The move, aimed at curbing speculative trading, has raised concerns about the future of the derivatives market, which has been a key driver of growth for the capital markets ecosystem. While the immediate reaction has been overwhelmingly negative, the market will now look for stability and clarity on how trading behavior adapts to this new, higher-cost environment.