STT Hike: Likely Impact on Arbitrage, Multi-Asset Fund Returns

Finance Minister Nirmala Sitharaman, in her budget speech on February 1, proposed an increase in Securities Transaction Tax (STT) on derivatives with effect from April 1, 2026. This move is going to have a considerable impact on the returns generated by arbitrage funds. Another category of funds – multi-asset allocation funds- is also likely to feel a subtle hit.

“The recent 150 per cent hike in STT on futures (from 0.02 per cent to 0.05 per cent, effective April 1, 2026) will modestly impact arbitrage mutual funds. These funds generate returns primarily through cash-futures arbitrage, with monthly futures rollovers,” says Anup Bhaiya, Founder of Money Honey Financial Service.

Edelweiss, in a note, assessed the impact of increased STT on arbitrage fund returns. Considering the incremental STT increase of 0.03 per cent, 70 per cent average arbitrage allocation, and 15-20 per cent monthly churn, the additional cost is estimated at 0.30-0.32 per cent per annum on net returns. As per the note, this is going to bring down the returns by around 0.90 per cent after increased STT.

“The return difference stems mainly from higher STT on the futures leg during rollovers and position adjustments,” says Bhaiya.

While not severe enough to dismantle their appeal as a low-risk, tax-efficient alternative to debt funds, the hit, believes Anup Bhaiya, could narrow their yield advantage over liquid/ultra-short duration funds by 25-35 bps annually.

However, “arbitrage funds remain attractive for conservative investors seeking equity taxation with minimal volatility, though slightly compressed returns may prompt some reallocation,” says Anup Bhaiya.

Coming to multi-asset allocation funds. For instance, in the case of Edelweiss Asset Allocation Fund that maintains an average equity arbitrage exposure of 25 per cent, the impact would be modest, around 0.08 per cent annualised.

As per the note by Edelweiss Mutual Fund, multi-asset allocation funds, which have a relatively lower exposure to equity arbitrage, are likely to face a smaller impact, which may further widen the return differential versus pure arbitrage funds.

In her budget speech, the Finance Minister said, “I propose to raise the STT on Futures to 0.05 per cent from the present 0.02 per cent. STT on options premium and exercise of options are both proposed to be raised to 0.15 per cent from the present rate of 0.1 per cent and 0.125 per cent, respectively.”

Why was STT raised in Budget 2026? The Union Budget 2026’s proposal to increase STT, as per Rajesh Sivaswamy, Senior Partner, King Stubb & Kasiva, Advocates and Attorneys, signals the government’s intent to moderate excessive speculative activity in the derivatives market.

Over the past few years, Sivaswamy explains, the sharp rise in retail participation, particularly in options trading, has raised concerns around market volatility and systemic risk.

“By recalibrating STT rates, the government appears to be nudging market participants towards more disciplined trading behaviour while also broadening the tax base through transaction-level levies rather than higher income taxation,” he adds.

Further, Sivaswamy believes, the increase is measured and does not fundamentally alter the cost structure for long-term or hedging-oriented participants.

The change in STT rates comes through Clause 143 of the Finance Bill that seeks amendment of section 98 of the Finance (No.2) Act, 2004 relating to the charge of securities transaction tax.