Budget 2026 Impact: STT Hike Triggers Market Crash, Wipes Out ₹9.5 Lakh Crore

Introduction: A Budget Day Shock

The Indian stock market experienced a severe downturn during a special weekend trading session on Sunday, February 1, 2026, immediately following the Union Budget speech by Finance Minister Nirmala Sitharaman. An unexpected proposal to increase the Securities Transaction Tax (STT) on derivatives trading sent shockwaves through Dalal Street, triggering a widespread sell-off. The benchmark BSE Sensex plummeted by over 1,500 points, while the Nifty 50 fell sharply below the 25,000 mark. The sudden negative sentiment led to an erosion of over ₹9.5 lakh crore in investor wealth in a single day, marking a turbulent start to the month.

The Proposal That Spooked the Market

The central point of concern for investors was the proposed hike in STT rates for the derivatives segment. Under the Budget 2026 proposals, the STT on futures contracts is set to rise significantly from 0.02% to 0.05%. Similarly, the tax on options premiums will increase from 0.10% to 0.15%, and the levy on exercised options will climb from 0.125% to 0.15%. This move represents a substantial increase in the cost of trading for participants in the futures and options (F&O) market, a segment that has seen explosive growth in volume in recent years. The higher transaction costs threaten to curb trading activity, directly impacting the revenue streams of brokerages and stock exchanges.

Carnage on Dalal Street

The market's reaction was swift and brutal. The BSE Sensex closed the session at 80,722.94, down 1,546.84 points or 1.88%. The Nifty 50 ended at 24,825.45, a drop of 495.20 points or 1.96%. The sell-off was broad-based, leading to a significant decline in the total market capitalization of BSE-listed companies, which fell by ₹9,55,242.35 crore to stand at ₹4,50,61,658.60 crore. Market volatility surged, with the India VIX, a gauge of market fear, skyrocketing by nearly 11%, indicating heightened uncertainty among investors.

Brokerages and Exchanges Bear the Brunt

Stocks of brokerage firms and exchanges were at the epicenter of the sell-off, as their business models are highly sensitive to trading volumes. Shares of BSE Ltd, Angel One, and Groww's parent company, Billionbrains Garage Ventures, plunged by as much as 13.5%. Investors feared that the higher STT would deter retail and institutional participation in the derivatives market, which has become a critical earnings driver for these companies. The sharp fall in these stocks reflected the market's immediate disapproval of the tax hike.

Sectoral Performance: A Sea of Red

Beyond the brokerage space, the selling pressure was widespread across most sectors. The Nifty PSU Bank index was the worst hit, crashing by nearly 5.6%. It was followed by the Nifty India Defence index, which dropped 5.09%, and the Nifty Metal index, which plunged 4.05%. Other major sectors, including Auto, FMCG, Realty, and Oil & Gas, also saw declines ranging from 2% to 3%. Heavyweight stocks such as SBI, Adani Ports, ITC, Tata Steel, and Reliance Industries were among the top losers. In a stark contrast, the Nifty IT index managed to end in the green with a modest gain of 0.6%, buoyed by budget announcements promoting AI adoption and a ₹10,000 crore outlay for a Biopharma Shakti initiative, which supported stocks like TCS and Infosys.

Key Market Data at a Glance

Expert Analysis and Outlook

Market experts viewed the STT hike as a short-term negative that could have longer-term implications. Shrikant Chouhan, Head of Equity Research at Kotak Securities, noted that the market formed a long bearish candle and is trading below its 200-day Simple Moving Average (SMA), which is a negative technical signal. He anticipates that volatility will continue, suggesting a level-based trading strategy for the near future. According to his analysis, 25,000 for the Nifty and 81,300 for the Sensex will act as crucial resistance levels. On the other hand, some analysts believe that while the move has caused immediate pain, it could be part of a broader government effort to standardize market participation costs. Vinayak Magotra of Centricity WealthTech stated that despite the near-term concern, the overall direction of the budget remains constructive and should be beneficial for the markets in the long run.

What Lies Ahead?

The immediate outlook for the market appears uncertain. The sharp correction has pushed key indices below critical technical support levels, and the surge in the VIX suggests that traders are bracing for more volatility. The market's direction in the coming sessions will depend on whether investors digest the impact of the higher trading costs or if the selling pressure continues. Analysts suggest that while long-term investors may find opportunities in sectors like infrastructure and financials, which received positive attention in the budget, the short-term trend remains weak.

Conclusion

The Union Budget 2026 delivered a significant jolt to the Indian stock market, primarily through the unexpected and steep hike in the Securities Transaction Tax. The move, aimed at increasing revenue from the booming derivatives market, backfired in the short term by triggering a massive sell-off and wiping out significant investor wealth. While the government's long-term fiscal objectives may be sound, the immediate market reaction underscores the sensitivity of investors to policy changes that directly impact trading costs and market liquidity. The focus now shifts to how the market stabilizes and adapts to this new cost structure in the weeks ahead.