Stock Market Crash Budget 2026: Sensex and Nifty Plunge on STT Hike

Indian benchmark indices Sensex and Nifty witnessed a sharp sell-off on Sunday, February 1, 2026, during a special trading session held for the Union Budget presentation. The market reaction was primarily triggered by Finance Minister Nirmala Sitharaman's proposal to increase the Securities Transaction Tax (STT) on derivatives. The BSE Sensex plunged by over 2,370 points intraday before recovering slightly, while the NSE Nifty 50 dropped below the 25,000 mark. This sudden volatility wiped out significant investor wealth as participants reassessed the cost of trading in the futures and options (F&O) segment.

The Sunday Special Session and Immediate Reaction

The stock markets were open for regular trading on a Sunday to coincide with the presentation of the Union Budget for the financial year 2026-27. While the session began with early gains, the sentiment turned bearish as soon as the tax proposals were announced. The 30-share BSE Sensex dived 2,370.36 points or 2.88 percent to hit an intraday low of 79,899.42. Similarly, the NSE Nifty tumbled 748.9 points or 2.95 percent to reach a low of 24,571.75. The market's unease was centered on the increased cost of transactions, which many analysts believe will impact liquidity and participation in the derivatives market.

Understanding the STT Hike on Derivatives

The primary catalyst for the market crash was the recalibration of the Securities Transaction Tax. The Finance Minister proposed to raise the STT on futures contracts to 0.05 percent from the previous 0.02 percent. Furthermore, the STT on options premium and the exercise of options was raised to 0.15 percent. This move is seen as an attempt by the government to curb excessive speculative trading in the F&O segment, which has seen a massive surge in retail participation over the last few years. However, for high-frequency traders and institutional investors, this represents a significant increase in impact costs.

Impact on Foreign Portfolio Investors (FPIs)

Market analysts noted that the hike in STT is likely to act as a negative factor for Foreign Portfolio Investor (FPI) flows in the near term. Global funds that focus on high-frequency trading and derivative strategies may find the Indian market less cost-competitive compared to other emerging markets. FPIs have already been net sellers in the Indian equity market over the past year, and the lack of capital gains tax relief in this budget, combined with higher transaction taxes, could further moderate their participation. The immediate market reaction reflected these concerns as institutional selling intensified during the afternoon session.

Sectoral Performance and Major Laggards

The sell-off was broad-based, affecting several key sectors. The Nifty PSU Bank index was the top sectoral loser, tanking 5.6 percent. Heavyweights like State Bank of India and Reliance Industries saw significant declines, falling 5.61 percent and 2.5 percent respectively. Other major laggards included Adani Ports, Bharat Electronics, ITC, Tata Steel, and UltraTech Cement. The Nifty India Defence index also dropped 5 percent, as the 15 percent increase in the defence outlay failed to meet the high expectations of market participants. Brokerage and exchange-related stocks, such as BSE Ltd and Angel One, tumbled by as much as 13.5 percent due to fears of shrinking trading volumes.

Winners Amidst the Volatility

Despite the overall market gloom, certain sectors managed to trade in the green. IT stocks emerged as gainers after the government increased the threshold for availing safe harbour for IT services from Rs 300 crore to Rs 2,000 crore. Companies like Tata Consultancy Services (TCS), Infosys, and Wipro ended the session higher. Additionally, data center-related stocks like Anant Raj Industries and Netweb Technologies soared up to 10 percent. This was driven by the announcement of a tax holiday until 2047 for foreign companies providing cloud services through India-based data centers.

Changes in Buyback Taxation

Another significant proposal that affected market sentiment was the change in the tax treatment of share buybacks. The Finance Minister announced that proceeds from buybacks would now be taxed as capital gains in the hands of shareholders. Previously, companies paid a buyback tax, making the proceeds tax-free for investors. This shift aims to bring uniformity to the tax treatment of different forms of capital return but was viewed negatively by investors who preferred the previous tax-efficient structure of buybacks.

The Capex Push and Long-Term Outlook

While the immediate reaction to the tax changes was negative, many analysts pointed to the strong capital expenditure (Capex) numbers as a long-term positive. The government has set the Capex target for FY27 at Rs 12.2 lakh crore, a double-digit increase from the previous year. This sustained focus on infrastructure, railways, and manufacturing is expected to support earnings visibility for companies in the capital goods and construction sectors. The budget also introduced the India Semiconductor Mission 2.0 and support for MSMEs, which could bolster the manufacturing ecosystem over the medium term.

Market Impact and Analysis

The sharp decline in the indices highlights the sensitivity of the Indian market to transaction-based taxes. The derivatives segment contributes a massive portion of the daily turnover on Indian exchanges. By increasing the STT, the government is effectively raising the barrier for entry for short-term speculators. While this may lead to lower volatility in the long run, the short-term impact is a reduction in liquidity. Analysts suggest that the market may remain range-bound as it digests the tax changes and waits for further cues from global markets and corporate earnings.

Conclusion

The Union Budget 2026 has sent a clear signal that the government intends to discourage speculative trading while prioritizing long-term infrastructure growth. The hike in STT on futures and options served as a significant dampener for market sentiment on Budget Day, leading to a sharp correction in benchmark indices. However, the record Capex allocation and sector-specific incentives for IT and data centers provide a fundamental cushion. Investors are advised to remain selective and focus on quality stocks with strong policy visibility as the market navigates this period of post-budget volatility.