Mumbai/New Delhi: The recent increase in Securities Transaction Tax (STT) on futures and options (F&O) trading, introduced in the Union Budget 2026 to reduce speculative volumes, is expected to hinder capital market activity in the short term, according to industry experts.
Market Reaction to STT Changes
The adjustment in STT rates triggered an immediate downturn in equity markets following Finance Minister Nirmala Sitharaman’s budget presentation. Brokerage firms and exchanges saw their shares decline sharply. The 30-share BSE Sensex, after dipping to intraday lows, closed 764.29 points or 0.93 percent lower at 81,505.49 around 2:42 p.m.
Sitharaman highlighted the changes as a way to introduce a balanced correction in the F&O segment while boosting government revenue. She proposed raising the STT on futures to 0.05 percent from 0.02 percent, and on options premium and exercise to 0.15 percent from 0.1 percent and 0.125 percent, respectively.
Regulatory data from the Securities and Exchange Board of India (SEBI) indicates that more than 90 percent of retail investors in the F&O market incur losses, prompting prior efforts to curb excessive trading volumes.
Expert Views on Short-Term Impact
Dhiraj Relli, managing director and chief executive of HDFC Securities, noted that the elevated STT on F&O will challenge capital market participants initially but could foster stability over time.
Shripal Shah, managing director and chief executive of Kotak Securities, pointed out that the sharp STT rise will elevate costs for traders, hedgers, and arbitrageurs. “The intent seems focused on moderating volumes rather than maximizing revenue, though any gains might be countered by reduced derivative activity,” Shah explained.
SAMCO Securities warned in its analysis that higher costs could suppress trading volumes, slow short-term market momentum, and erode profits for active participants. The firm also cautioned that declining post-tax efficiency might deter foreign institutional investors, potentially affecting revenues for brokers, exchanges, asset managers, and depositories.
Shrikant Chouhan, head of equity research at Kotak Securities, described the STT hike as a source of near-term unease for equity F&O markets. He added that treating buyback proceeds as capital gains offers a positive counterbalance, bolstering confidence among long-term investors.
Long-Term Benefits and Market Evolution
Anand James, chief market strategist at Geojit Investments Ltd, observed that the STT increase appears favorable for equities by making options trading costlier. However, he suggested it might prompt portfolio rebalancing that temporarily pressures the equity segment. James questioned whether the change alone would deter speculative options trading.
Mahavir Lunawat, chairman and managing director of Pantomath Capital, viewed the STT modifications as steps toward greater market stability. “These shifts, combined with emphasis on digital tools and quicker settlements, enhance transparency and resilience in our trading environment, positioning Indian markets as a global leader,” Lunawat stated.
Narinder Wadhwa, managing director and chief executive of SKI Capital Services Ltd, aligned the STT and Commodities Transaction Tax (CTT) tweaks with a philosophy of promoting prudent market practices. “This could temper volumes in high-frequency derivatives without impacting long-term or delivery-based investors,” Wadhwa said. He emphasized that the budget encourages a shift toward investment, hedging, and price discovery over leveraged speculation.
For market intermediaries, Wadhwa predicted short-term revenue squeezes from derivatives but medium- to long-term gains through deeper cash markets, wealth management, and investor advisory services.
Ashishkumar Chauhan, managing director and chief executive of the National Stock Exchange (NSE), praised the budget for strengthening financial markets via targeted measures, including the higher STT on derivatives to limit over-speculation.
Anuj Choudhary, research analyst at Mirae Asset Sharekhan, highlighted disappointment among foreign investors due to rising transaction costs from the STT adjustments on equity futures and options premiums.
