Budget 2026 STT Hike: F&O Trading Costs to Rise Sharply

In a significant move impacting capital market participants, Finance Minister Nirmala Sitharaman, in the Union Budget 2026, announced a proposal to increase the Securities Transaction Tax (STT) on futures and options (F&O) contracts. The decision aims to curb excessive speculation in the derivatives market and protect retail investors from high-risk trading activities. This measure will directly increase transaction costs for active traders, particularly those engaged in high-frequency and short-term strategies.

Key Changes in STT Rates

The budget proposes a substantial hike in STT for both futures and options segments. The tax on futures contracts is set to more than double, while the levy on options premiums will also see a considerable rise. These new rates are expected to be effective from April 1, 2026.

Derivative Segment	Current STT Rate	Proposed STT Rate (Budget 2026)	Change
Futures Contracts	0.02%	0.05%	+150%
Options Premium	0.1%	0.15%	+50%

This adjustment marks a clear policy signal from the government to moderate the explosive growth seen in derivatives trading volumes over the past few years.

Rationale Behind the Tax Hike

The government's decision is rooted in growing concerns from regulators about the high level of speculative activity in the F&O market. A 2025 study by the Securities and Exchange Board of India (SEBI) highlighted that over 90% of individual traders in the F&O segment incurred net losses. By making speculative trades more expensive, the government intends to discourage excessive risk-taking and promote a more stable market environment. SEBI has already taken steps to tighten participation rules, and this tax increase is seen as a complementary fiscal measure.

Calculating the Impact on Traders

The increase in STT will have a tangible impact on the profitability of trades. For frequent traders, even a small percentage increase can significantly erode net returns.

For Futures Traders: Consider a Nifty futures contract with a lot value of ₹2,00,000.

• Old STT: At 0.02%, the tax was ₹40 per lot.
• New STT: At 0.05%, the tax will be ₹100 per lot. This represents an additional cost of ₹60 for every lot traded, a substantial increase for traders dealing in large volumes.

For Options Traders: STT on options is levied on the premium value. If a trader buys a Nifty option lot with a premium of ₹10,000:

• Old STT: At 0.1%, the tax was ₹10.
• New STT: At 0.15%, the tax will be ₹15. While the absolute increase of ₹5 per lot seems small, it accumulates quickly for traders who execute hundreds of trades daily.

Market Reaction and Sector Impact

The announcement triggered an immediate negative reaction in the stock market. Key indices like the Sensex and Nifty saw sharp declines as the news broke. Stocks of brokerage firms and exchanges, including BSE, Angel One, and Groww, fell by up to 10%. Higher transaction costs could potentially lead to a reduction in trading volumes, which directly impacts the revenue of these companies.

Expert Analysis

Market analysts view the STT hike as a calibrated step to manage market risk. Rajarshi Dasgupta, Executive Director at AQUILAW, noted that while the move targets speculative excesses, the challenge will be to ensure that market liquidity and price discovery are not adversely affected. He suggested that the government might need to make timely adjustments if trading volumes are significantly impacted.

Divam Sharma, Co-founder of Green Portfolio PMS, believes the hike is modest and unlikely to be a long-term deterrent for active traders. He stated that the more important factor will be whether this leads to more disciplined trading behaviour among participants.

Contrasting Move on Buyback Tax

Interestingly, while increasing the tax on derivatives, the budget provided some relief to minority investors in share buybacks. The proposal allows individual investors to treat gains from buybacks as capital gains, subjecting them to a lower tax rate of 12.5% for long-term holdings, down from the previous flat rate of 20%. However, to prevent tax arbitrage, the tax rate for promoters participating in buybacks has been increased.

Investor Category	Old Buyback Tax	Proposed Buyback Tax (Budget 2026)
Minority/Individual Investors	20%	12.5% (as long-term capital gains)
Corporate Promoters	20%	22%
Non-Corporate Promoters	20%	33%

Conclusion

The Union Budget 2026's decision to raise STT on F&O trading is a clear regulatory intervention aimed at cooling down a heated market segment. It will force short-term and high-frequency traders to reassess their strategies and cost structures. While the long-term impact on market liquidity remains to be seen, the immediate effect is higher costs and a renewed focus on risk management for all derivative traders.