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Union finance minister Nirmala Sitharaman, in her Budget 2026 speech, increased the securities transaction tax (STT) on futures and options (F&O) transactions, raising the levy on futures two-and-a-half times to 0.05% from 0.02% and on options by 50% to 0.15% from 0.1%.

“To provide reasonable course correction in the F&O segment in the capital market and generate additional revenues for the government, it is proposed to raise the STT on futures to 0.05% from the present 0.02%. STT on options premium and exercise of options is proposed to be raised to 0.15% from the present rate of 0.1% and 0.125%, respectively,” said Sitharaman while presenting the Union Budget 2026-27.

The announcement led to a sharp fall in the equity market, with the benchmark Sensex crashing more than 2,000 points intraday, and the Nifty 50 slipping below 24,600.

Meanwhile, BSE and Angel One declined by up to 10% each, Groww fell by more than 9%, and IIFL Finance traded 4.9% lower after the budget announcement.

The government left the transaction tax on equity cash-based trades untouched, indicating its intent to make trading costs dearer in equity derivatives, according to analysts.

However, it was a knee-jerk reaction, as the cost of trading options would rise by less than a fifth, while futures, which have negligible volumes on BSE, would see trading costs more than double, they added.

“This will have a medium impact on trading volumes, but it's an ill-timed move, given the current market sentiment,” said Rajesh Baheti, managing director of Crosseas Capital Services Pvt. Ltd, one of the largest jobbing and arbitrage brokers.

“Had the FM reduced the STT on cash-based trades while increasing that on derivatives, it would have been good. This is also a dampener for arbitrage funds,” added Baheti.

Currently, the STT on equity-based delivery trades is 0.1% for the purchaser, based on the volume-weighted average price, which measures the price at which the highest volume has occurred.

For example, if 100 shares are purchased at ₹10 each and 50 shares at ₹12 each, the VWAP is ₹10.66.

“I think the reaction on MCX is inexplicable as the CTT (commodity transaction tax) rate on futures (0.01% ) and on options (0.05%) has been left untouched,” said Amit Chandra, vice-president-research at HDFC Securities. Rather, CTT will increase due to volatility-induced bump-up in turnover of metals and energy, he said.

On BSE too, the negative reaction on account of the Budget 2026 is “knee-jerk”, Chandra added, as BSE futures turnover was negligible.

The average daily premium turnover on BSE in January stood at ₹28,769 crore. The average daily futures turnover, on the other hand, stood at only ₹324.5 crore.

On the unlisted National Stock Exchange (NSE), the country's largest stock exchange, options (premium turnover) contributed to 75% ( ₹2,083 crore) of transaction income of ₹2,760 crore in the September quarter of 2025-27, while futures contributed just 11.3% ( ₹312 crore), with cash and currency derivatives accounting for the rest.

However, Baheti said the cost of trading for mutual funds' arbitrage funds would rise substantially as they tend to lock in spreads by selling futures against their cash-stock holdings.

The proposal, coming on top of last year’s hike, is likely to raise impact costs for traders, hedgers, and arbitrageurs, said Shripal Shah, MD & CEO, Kotak Securities.

“This could cool derivative activity and lead to a reduction in volumes. The intent appears to be volume moderation rather than revenue maximization, as any potential revenue gain could be offset by lower derivative volumes,” said Shah.

Aakash Shah, technical research analyst at Choice Equity Broking, noted that the hike in STT on F&O is likely to act as a marginal negative for foreign portfolio investor (FPI) flows in the near term, particularly for high-frequency and derivative-focused global funds.

“A higher STT further reduces post-tax returns, making India relatively less competitive for short-term and derivative-oriented foreign flows. However, for long-only, fundamentally driven FPIs, the STT hike is unlikely to be a deal-breaker," Shah said. 

"That said, at the margin, higher transaction costs could tilt some global allocators towards other Asian markets, especially at a time when India is already facing pressure from AI-led capital shifts to the US, Taiwan, and Korea,” Shah added.

Overall, while the STT hike may help boost tax collections, it risks dampening trading volumes and could slow tactical FPI participation, he added. “To meaningfully revive sustained FPI inflows, investors will be looking more closely at macro stability, rupee movement, and consistency in tax policy rather than just growth optics.” 

“I am all for the hike in STT on derivatives as the poison of this trading has to be removed from the system,” said veteran investor Shankar Sharma. “The clear intent of the government was visible in their leaving the rate on equity cash untouched.”

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