Budget 2026 STT Hike Triggers Market Rout as Investors Lose Rs 10 Lakh Crore

Indian equity markets experienced a severe downturn during a special weekend trading session on Sunday, February 1, 2026. The sell-off was primarily triggered by Finance Minister Nirmala Sitharaman's announcement of a steep hike in the Securities Transaction Tax (STT) on futures and options (F&O) trades. This unexpected move aimed at curbing speculative activity led to a massive erosion of investor wealth, with nearly Rs 10 lakh crore wiped out from the BSE market capitalisation in a single day.

Intense Volatility During Special Session

The market opened with a marginal cut but slipped into a tailspin as the Finance Minister detailed the new tax structure for derivatives. The BSE Sensex, which had touched an intraday high of 82,727, plunged nearly 3,000 points to an intraday low of 79,899.42. It eventually closed at 80,723, marking a decline of 1,546 points or 1.88 per cent. Similarly, the NSE Nifty 50 slipped to an intraday low of 24,572 before settling at 24,825, down 495 points or 1.96 per cent.

The sharp decline reflected widespread panic among traders and investors. The total market capitalisation of all BSE-listed companies fell by approximately Rs 9.72 lakh crore, dropping to Rs 450.15 lakh crore. Market volatility, measured by the India VIX, surged by nearly 12 per cent, indicating heightened anxiety. The breadth of the market was overwhelmingly negative, with over 2,300 stocks declining on the BSE compared to around 1,700 advances.

The STT Hike Details

The primary catalyst for the rout was the proposed revision of STT rates for the derivatives segment, effective from April 1, 2026. The government proposed to increase the STT on futures contracts from 0.02 per cent to 0.05 per cent, representing a 150 per cent jump. For options, the tax on premiums was raised from 0.10 per cent to 0.15 per cent, while the levy on exercised options climbed from 0.125 per cent to 0.15 per cent.

Sectoral Impact and Top Laggards

Sectoral performance was largely negative, with the Nifty PSU Bank index being the worst hit, plunging nearly 5.6 per cent. This was followed by the Nifty Metal index, which declined 4.05 per cent. The Nifty Bank and Nifty Financial Services indices also fell over 2.36 per cent each, dragged down by selling in heavyweight lenders. Realty stocks faced intense pressure, with the Nifty Realty index falling 4.6 per cent intraday before settling 2 per cent lower.

Brokerage firms and stock exchanges were at the epicentre of the sell-off. Shares of BSE Ltd and Angel One tumbled by as much as 13.5 per cent. Investors expressed concern that higher transaction costs would deter active traders and high-frequency trading firms, which currently account for a significant portion of derivative volumes. In contrast, the Nifty IT index was the only major sectoral gainer, with TCS and Infosys bucking the trend to end in the green.

Budget Growth Agenda and Capex

While the STT hike dominated market sentiment, the Budget also outlined a long-term growth strategy. The Finance Minister proposed a capital expenditure outlay of Rs 12.2 lakh crore for FY27, a 9 per cent increase from the previous year's Rs 11.2 lakh crore. Although this was a record high, it fell slightly below market expectations of a double-digit increase. The government also targeted a fiscal deficit of 4.3 per cent of GDP for FY27, continuing its path of fiscal consolidation.

Global Cues and Market Sentiment

External factors also contributed to the cautious mood. Global markets were unsettled by the nomination of Kevin Warsh as the next Chair of the U.S. Federal Reserve, who is perceived as an inflation hawk. This led to a stronger U.S. Dollar and a reassessment of interest rate expectations. Additionally, reports of a brief U.S. government shutdown added to the global uncertainty, influencing foreign institutional investor sentiment in India.

Analysis of the STT Move

Market analysts suggest that the STT hike is a deliberate regulatory attempt to moderate excessive speculative activity in the F&O segment. The government noted that a vast majority of individual retail traders in derivatives incur net losses. By increasing the cost of trading, the regulator aims to protect small investors and redirect capital toward long-term investments. However, the immediate impact is a reduction in liquidity and a potential shift in trading behavior among high-volume participants.

Conclusion

The Union Budget 2026 has delivered a significant shock to the Indian capital markets through its taxation changes on derivatives. While the government's focus remains on infrastructure and manufacturing-led growth, the immediate increase in transaction costs has overshadowed these long-term positives. Investors will now closely monitor how trading volumes adapt to the new cost structure and whether the government provides any further clarifications on capital gains or other tax reforms in the coming weeks.