The hike in securities transaction tax (STT) on futures and options (F&O), as announced in the Union Budget 2026-27, will come into effect from April 1, 2026, with the beginning of the new financial year.
The government had announced to raise STT on futures trades to 0.05 per cent from 0.02 per cent. In the options segment, the tax on premiums will increase to 0.15 per cent from 0.1 per cent, while the tax on exercise of options will go up to 0.15 per cent from 0.125 per cent.
Announcing the measures in her Budget 2026 speech, finance minister Nirmala Sitharaman said the hike is aimed “to provide reasonable course correction in the F&O segment in the capital market and generate additional revenues for the government.”
The revised STT rates apply only to derivatives trades, and not on equity delivery and intraday transactions.
The STT hike comes amid persistent concerns over excessive speculation by traders, especially retail traders. Studies by the Securities and Exchange Board of India (Sebi) have consistently shown that more than 90 per cent of retail participants end up losing money in F&O trading.
The government had earlier raised STT in the 2023 Budget. It increased STT on the sell side of futures trades from 0.01 per cent to 0.0125 per cent, and on the sell side of options contracts from 0.05 per cent to 0.0625 per cent. This hike came into effect from April 1, 2023
STT hike is not the only measure the government is taking to dissuade retail traders from participating in F&O. In November 2024, Sebi had tightened rules in the derivatives segment by introducing measures such as mandatory upfront premium payments, restrictions on certain spread benefits, and stricter exposure limits.
Higher Tax On Futures May Push Traders Toward Options
Market participants expect trading volumes, particularly in futures, to ease in the near term as higher transaction costs take effect.
With STT on futures trades increasing to 0.05 per cent from 0.02 per cent earlier, there is a sharp 150 per cent rise in tax, while STT on options premiums increasing to 0.15 per cent from 0.1 per cent, there is a 50 per cent rise, and STT on the exercise of options going up to 0.15 per cent from 0.125 per cent, there is a 20 per cent increase.
Given this imbalance, the 150 per cent increase in STT on futures may push traders further towards options rather than discouraging derivatives trading altogether, defeating its purpose.
Nithin Kamath, founder and CEO of Zerodha, shared a similar view in a LinkedIn post last month. "95 per cent of trading is already in options, and this STT increase will only push that share higher. Why? Because the impact falls mostly on futures, while options are far more speculative than futures."
Data from National Stock Exchange (NSE), shows that a large majority of trading activity already comes from the options segment. In FY26, about 4.10 crore index futures contracts were traded on the NSE. In contrast, the index options saw 3,468.70 crore volume.
Higher STT Expected To Narrow Arbitrage Opportunities
The increase in STT is also expected to narrow arbitrage opportunities in the derivatives segment by raising the cost of executing such trades.
Edelweiss, in a note, evaluated the impact of the higher STT on arbitrage fund returns. It said that an incremental STT increase of 0.03 per cent, 70 per cent allocation to arbitrage and monthly churn of 15–20 per cent, could raise costs by about 0.30–0.32 per cent annually. This, in turn, may lower overall returns by roughly 0.90 per cent after factoring in the higher tax.
Higher STT Could Weigh On FPI Flows
The STT hike is also expected to weigh on foreign portfolio investor (FPI) activity in the derivatives segment.
Higher STT reduces the returns investors earn after tax, which can make India less attractive for short-term and arbitrage-focused foreign investors. However, not all FPIs are expected to react the same way. Long-term FPIs, who focus on fundamentals of the companies, currency stability and policy environment, are less likely to be affected by such changes. This could prompt some global investors to look at other Asian markets for short-term allocations.
This comes at a time when FPIs have already offloaded a record Rs 1.18 lakh crore in March alone amid the ongoing US-Israel-Iran war.
Brokerage Firms To Feel The Thaw
A slowdown in overall trading activity can also, in turn, affect revenue streams of market intermediaries such as brokerages, exchanges, asset management companies (AMCs) and depositories.
