Summary of this article
Budget 2026 announce the hike in STT on futures and options
The hike in transaction costs could dent around 20-30 per cent of trading volumes
Union Finance Minister, Nirmala Sitharaman announced a hike in Securities Transaction Tax (STT) in the Budget for financial year 2026-27. The increase in STT is expected to raise transaction costs as well as impact trading volumes, according to brokers and market analysts.
The transaction tax on futures has been increased to 0.05 per cent from 0.02 per cent. Meanwhile, on options the STT has been raised to 0.15 per cent from 0.10 per cent.
Market participants and analysts said that the move could hit trading volumes in F&O by nearly 20-30 per cent. Some market participants were also of the opinion that the fall in liquidity in derivatives markets could also impact inflows from global investors into Indian equity markets.
FPIs have already been offloading their exposures in Indian equities in the wake of higher tariff pressures as well as high valuations coupled with mixed earnings.
“We must be realistic about the impact of STT on capital markets. The STT hike and the removal of dividend set-offs seem to be bringing a headwind to markets. They make many high-frequency and arbitrage trades unviable, which will squeeze market liquidity and leverage in the short term,” Raamdeo Agrawal, Chairman & Co-founder, Motilal Oswal Financial Services said.
Market participants also said that the move to raise STT could also add to friction costs and make it difficult to transact in the cash market, especially for hedge funds. They said that instead of increasing STT on derivatives trading, the government could have reduced STT in the cash segment which would help in deepening the market.
Notably, a sharp fall was seen in equity markets post the announcement of the STT hike, clocking the worst Budget day performance for equities since 2020. On February 1, 2020, the Nifty 50 index had fallen 2.5 per cent while the BSE Sensex was down 2.6 per cent.
The move could also reduce overall market liquidity. The cash market in India already has thin trading volumes and the move to reduce liquidity in derivatives could also impact liquidity in the cash segment, according to market participants.
The proposed changes in STT will come into effect from the beginning of the new financial year in April. The STT is likely to have been hiked by the Centre to curb speculative trading in the futures and options (F&O) segment.
"We also need to make sure that people with their savings don't go to engage in high fluctuating or higher risk ventures. No harm in participating in F&O or no harm in going and investing in the equity market, but eventually, we need to be using financial information, authentic information, before we take a call,” Sitharaman had said in an earlier interview on Network18.
Markets regulator Securities and Exchange Board of India (Sebi) has been reportedly mulling to raise entry barriers to F&O trading amid a rise in retail investors in the high-risk segment.
Sebi had last year flagged the risk for retail investors in trading in the F&O segment and intervened in monitoring limits on investors’ positions. Despite these moves, individual’s share in premium turnover of index options rose to 41.1 per cent in November 2025, from 36 per cent in November 2024, when Sebi’s F&O framework took effect.
