Budget 2026: STT Hike on F&O Triggers 1,500 Point Sensex Crash

Indian equity markets experienced a volatile and ultimately bearish session on February 1, 2026, as the Union Budget 2026-27 introduced unexpected tax hikes on derivative trading. While the budget was initially anticipated to be a growth-oriented document focusing on infrastructure and manufacturing, the announcement of a steep increase in the Securities Transaction Tax (STT) on Futures and Options (F&O) sent shockwaves through Dalal Street. The benchmark BSE Sensex plunged over 1,500 points, while the Nifty 50 slipped below the 25,000 mark during a special Sunday trading session.

The Immediate Impact of STT Revisions

The primary trigger for the market's sharp decline was the Finance Minister's proposal to raise the STT on futures and options. The tax on futures was increased from 0.02% to 0.05%, while the STT on options premium was raised to 0.15% from the previous 0.1%. This move is seen as a direct attempt to curb speculative activity in the derivatives segment, which has seen explosive growth in retail participation over the last few years.

Market veterans noted that the hike was a significant shock because it directly increases the transaction costs for high-frequency traders, arbitrageurs, and retail speculators. Nilesh Shah, founder of Envision Capital, described the move as a "syntax" on speculative behavior, noting that while it may dampen sentiment in the near term, it aligns with the government's objective of protecting retail investors from high-risk trading where a majority lose money.

Market Indices and Wealth Erosion

The scale of the sell-off was evident in the closing figures. The BSE Sensex ended the day at 80,722.94, down 1,546.84 points or 1.88%. Similarly, the Nifty 50 closed at 24,825.45, losing 495.20 points or 1.96%. The intraday volatility was even more pronounced, with the Sensex at one point diving nearly 3,000 points before recovering slightly toward the end of the session.

This massive correction resulted in the erosion of approximately ₹9.72 lakh crore in investor wealth in a single day. The India VIX, a measure of market volatility, surged by nearly 11% to reach 15.09, indicating heightened fear and uncertainty among traders. The broader markets were not spared either, with the Nifty Midcap 100 and Smallcap 100 indices falling 2% and 2.7% respectively.

Sectoral Performance and Specific Laggards

Capital market-linked stocks were the worst hit by the STT announcement. Shares of stock exchanges and brokerage firms saw double-digit declines as investors anticipated a drop in trading volumes. Multi Commodity Exchange (MCX) tumbled over 18%, while BSE Ltd and Angel One saw their share prices drop by 15% and 13% respectively.

Public Sector Undertaking (PSU) banks and the metal sector also faced heavy selling pressure. The Nifty PSU Bank index plunged nearly 6%, and the Nifty Metal index declined by 4%. These sectors were impacted by a combination of global cues, such as a stronger US Dollar, and domestic concerns regarding the government's borrowing program.

Summary of STT Rate Changes

The Capex Silver Lining

Despite the immediate negative reaction to the tax changes, the budget maintained a strong focus on long-term structural growth. The government increased the capital expenditure (capex) outlay to ₹12.2 lakh crore for FY27, a double-digit increase from the previous year. This spending is directed toward infrastructure, railways, urban development, and green energy.

Nilesh Shah of Kotak Mahindra AMC highlighted that for the first time, proposed capital expenditure exceeds the net market borrowing program (₹11.7 lakh crore). This suggests that the government is funding its growth initiatives through internal accruals and fiscal discipline rather than excessive debt, which is a positive signal for the country's long-term economic health.

Pockets of Resilience: IT and Tourism

Not all sectors ended the day in the red. The Nifty IT index showed resilience, supported by a revision in buyback taxation. The budget proposed taxing share buybacks as capital gains for shareholders, which is expected to benefit minority investors in cash-rich IT firms. Additionally, the safe harbor threshold for IT services was increased to ₹2,000 crore, providing regulatory relief to the sector.

Tourism and hospitality stocks also found support following the reduction of Tax Collected at Source (TCS) on overseas tour packages from a tiered 5-20% to a flat 2%. This move is expected to boost outbound travel demand. Furthermore, the government's plan to develop 15 archaeological sites as cultural destinations provided a boost to heritage tourism sentiments.

Market Impact and Analyst Views

Analysts believe the market's reaction was a knee-jerk response to the unexpected STT hike. Samir Arora of Helios Capital mentioned that the market was not prepared for a negative surprise of this magnitude, especially when foreign portfolio investor (FPI) sentiment was already fragile. FPIs have been net sellers in the Indian market, and the lack of direct incentives for foreign capital in the budget added to the cautious mood.

However, many experts suggest that once the initial shock of the transaction tax wears off, the market will pivot back to fundamental drivers such as corporate earnings and the massive infrastructure push. The fiscal deficit target of 4.3% for FY27 demonstrates the government's commitment to fiscal prudence, which should eventually stabilize bond yields and support equity valuations.

Conclusion

The Union Budget 2026 has set a complex tone for the Indian markets. While the STT hike on derivatives has created immediate pain for traders and market intermediaries, the underlying focus on capex and fiscal discipline provides a solid foundation for long-term investors. The market is expected to remain volatile in the short term as it adjusts to the new cost structures, but the focus will eventually shift to the execution of the government's ambitious infrastructure and manufacturing plans. Investors are advised to focus on quality stocks and maintain a disciplined approach during this period of transition.