Union Budget 2026: Understanding the STT Hike and Its Impact on F&O Trading
The Union Budget 2026-27 brought a key change for India’s derivatives market: a rise in the Securities Transaction Tax (STT) on futures and options (F&O). Revenue Secretary Arvind Shrivastava explained that the move aims to curb speculative trading and reduce systemic risk.
“The primary objective of raising STT has been that it is felt that when you look at the volume of transactions in futures and options, whether you compare it to the size of GDP or the size of the underlying securities, it is largely in the realm of heavy speculation, which results in losses to small, retail, unsophisticated investors, and the government’s intention is to discourage speculative tendencies, and the increase in rates is essentially in that direction. It is meant to handle the systemic risks in the derivatives market. Even after this increase, the rates of STT will remain modest compared to the volume of transactions that is happening,” Shrivastava said.
Under the Budget proposals, STT on futures contracts rises to 0.05% from 0.02%, while STT on options premium and exercise of options is set to go up to 0.15% and 0.125%, respectively.
Shripal Shah, MD & CEO of Kotak Securities, added, “The steep increase in STT on futures and options, coming on top of last year’s hike, is likely to raise impact costs for traders, hedgers, and arbitrageurs. This could cool derivative activity and lead to a reduction in volumes. The intent appears to be volume moderation rather than revenue maximisation, as any potential revenue gain could be offset by lower derivative volumes."
Sonam Srivastava of Wright Research PMS highlighted the longer-term perspective for foreign investors: “PROI investors tend to be long-term, often with personal or economic links to India, and their capital is typically stickier than hot money flows. Increasing the aggregate cap from 10% to 24% meaningfully expands headroom, especially in mid- and large-cap names where foreign ownership limits often become binding constraints. Over time, this can improve liquidity, reduce volatility at the margin, and support better price discovery."
The STT hike signals a clear intent by the government: discourage excessive speculation, safeguard small investors, and manage risks in the derivatives market—though it may come with short-term market jitters.
“The primary objective of raising STT has been that it is felt that when you look at the volume of transactions in futures and options, whether you compare it to the size of GDP or the size of the underlying securities, it is largely in the realm of heavy speculation, which results in losses to small, retail, unsophisticated investors, and the government’s intention is to discourage speculative tendencies, and the increase in rates is essentially in that direction. It is meant to handle the systemic risks in the derivatives market. Even after this increase, the rates of STT will remain modest compared to the volume of transactions that is happening,” Shrivastava said.
Under the Budget proposals, STT on futures contracts rises to 0.05% from 0.02%, while STT on options premium and exercise of options is set to go up to 0.15% and 0.125%, respectively.
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Markets Spooked
The announcement rattled equity markets on Sunday, February 1. The Sensex tumbled over 1,500 points, closing at 80,722.94, while the Nifty 50 fell 495 points to 24,825.45. At one point, the Sensex had lost more than 2,300 points from the day’s high, as traders reacted to the higher STT.What Experts Say
Feroze Azeez, Joint CEO of Anand Rathi Wealth, noted, “The increase in STT on futures and options significantly raises transaction costs for derivatives traders, particularly impacting high-frequency traders, arbitragers and Hedgers (thereby impacting their strategies). This could lead to lower derivative volumes and near-term volatility in the markets. While the move is positive from a government revenue perspective, brokerage houses may see pressure on transaction-led earnings, and markets could face some immediate downside as participants adjust to higher costs."Shripal Shah, MD & CEO of Kotak Securities, added, “The steep increase in STT on futures and options, coming on top of last year’s hike, is likely to raise impact costs for traders, hedgers, and arbitrageurs. This could cool derivative activity and lead to a reduction in volumes. The intent appears to be volume moderation rather than revenue maximisation, as any potential revenue gain could be offset by lower derivative volumes."
Sonam Srivastava of Wright Research PMS highlighted the longer-term perspective for foreign investors: “PROI investors tend to be long-term, often with personal or economic links to India, and their capital is typically stickier than hot money flows. Increasing the aggregate cap from 10% to 24% meaningfully expands headroom, especially in mid- and large-cap names where foreign ownership limits often become binding constraints. Over time, this can improve liquidity, reduce volatility at the margin, and support better price discovery."
The STT hike signals a clear intent by the government: discourage excessive speculation, safeguard small investors, and manage risks in the derivatives market—though it may come with short-term market jitters.
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