Budget 2026 STT Hike Sparks Market Crash of 2,800 Points

Introduction: A Sharp Reversal on Budget Day

The Indian stock market experienced a dramatic intraday sell-off during a special trading session on Sunday, February 1, 2026, immediately following the Union Budget presentation. After initially climbing to new highs, the benchmark indices took a sharp plunge after Finance Minister Nirmala Sitharaman announced a proposal to increase the Securities Transaction Tax (STT) on futures and options (F&O) trading. The unexpected move triggered widespread profit-booking and erased all early gains, leading to a significant drop in investor sentiment.

The STT Hike Proposal

The central trigger for the market downturn was the proposed revision in STT rates for the derivatives segment. The Finance Minister announced a substantial increase in transaction costs, which directly impacts traders, hedgers, and arbitrageurs. The changes aim to moderate high-volume derivatives trading, which has expanded rapidly in recent years.

This move effectively more than doubles the tax on futures trading and significantly raises the cost for options traders, a segment that contributes heavily to market volumes.

Unpacking the Market Carnage

Before the announcement, the market was trading with optimism. The BSE Sensex reached an intra-day high of 82,727. However, sentiment reversed sharply following the STT proposal. The Sensex tumbled to a low of 79,899, marking a steep fall of 2,828 points, or 3.4%, from its peak. Similarly, the NSE Nifty 50, which had touched a high of 25,442, plunged 869 points to a low of 24,572. The sell-off was broad-based, wiping out an estimated ₹6 lakh crore from the market capitalization of companies listed on the BSE.

Why the Market Reacted Negatively

The hike in STT is perceived as a significant negative for market participants. Higher transaction costs can reduce liquidity by making frequent trading more expensive. This particularly affects high-frequency traders and retail participants who operate on thin margins. Analysts fear this could curb volumes in the F&O segment, which is a major revenue source for brokerages and stock exchanges. Stocks of companies like BSE Ltd and Angel One reflected these concerns, falling as much as 15% during the session.

Impact on Foreign Portfolio Investors

The decision also comes at a time when Foreign Portfolio Investors (FPIs) have been cautious. In January 2026 alone, FPIs pulled out over ₹41,000 crore from Indian equities amid a global risk-off sentiment. Analysts believe the higher STT further reduces post-tax returns, making India a relatively less competitive market for short-term and derivative-focused foreign funds. Aakash Shah, an analyst at Choice Equity Broking, noted that higher transaction costs could divert some global allocations towards other Asian markets.

Sectoral and Stock-Specific Performance

The sell-off was visible across the board. The PSU Bank index was the worst-performing sectoral index, falling over 4%. Heavyweights like State Bank of India (SBI) and Reliance Industries were major draggers on the Sensex, with SBI losing 5.5%. Other significant losers included Bharat Electronics (BEL), which fell 8%, along with NTPC, HCL Technologies, and Tata Steel, each dropping around 4%. The broader market also suffered, with the BSE MidCap index slipping over 2% and the SmallCap index declining by 1.7%.

Volatility and Investor Caution

Market volatility, as measured by the India VIX, surged over 17% to 15.66, indicating heightened nervousness among investors. The sharp reaction underscores the market's sensitivity to policy changes that affect trading costs and liquidity. Experts noted that while the budget focused on long-term growth and fiscal discipline, the immediate impact of increased transaction costs overshadowed other positive announcements.

Conclusion and Outlook

The sharp market correction on Budget Day was a direct reaction to the proposed hike in the Securities Transaction Tax. While the government's intention may be to curb excessive speculation, the immediate consequence was a broad-based sell-off driven by fears of reduced liquidity and lower trading volumes. In the near term, the market is expected to remain volatile as it digests the implications of these higher costs. Investors will be closely watching for further clarity on policy implementation and global cues to determine the market's future direction.