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Budget 2026: The Indian stock market witnessed a sudden, sharp fall of up to 3% in intraday trade on Sunday, February 1, after Finance Minister Nirmala Sitharaman proposed a steep increase in Securities Transaction Tax on derivatives. STT on futures was raised to 0.05% from 0.02%, while STT on options transactions was increased to 0.15% from 0.01% earlier. However, markets later recovered part of the losses to close around 2% lower.

She stated in her speech, "I propose to raise the STT on Futures to 0.05% from the present 0.02%. STT on options premium and exercise of options are both proposed to be raised to 0.15% from the present rate of 0.1% and 0.125%, respectively," the FM said in her budget speech.

This means for every ₹1 lakh worth of futures sold, traders will now pay ₹20 as STT compared to the earlier ₹12.50. Similarly, on a ₹10,000 options contract sale, STT has risen to ₹10 from ₹6.25 earlier.

Following the announcement, the BSE Sensex fell 1,547 points, or 1.88%, to close at 80,722.94, while the Nifty 50 declined 495 points, or 1.96%, to settle at 24,825.45. Investors saw an erosion of nearly ₹10 lakh crore in a single session as the total market capitalisation of BSE-listed companies dropped to ₹450 lakh crore from ₹460 lakh crore in the previous trading session.

Jimeet Modi, Founder & CEO of SAMCO Group, believes the increase in Securities Transaction Tax on futures and options has deeper implications than it appears on the surface. He said, “On our India Budget Strength Index, this budget scores a 4/10 — essentially a defensive budget that preserves stability but misses a major growth and capital-market opportunity.”

He explained that while fiscal discipline remains intact, the higher STT weakens India’s global capital attractiveness by affecting market microstructure. According to him, higher derivatives costs could reduce volumes, which may spill over into lower cash market activity, thinner liquidity, and a higher liquidity premium demanded by global investors. Over time, this could influence valuation multiples, fundraising conditions, and capital allocation decisions.

Securities Transaction Tax (STT) is a tax levied on the purchase and sale of securities such as shares, futures, and options traded on recognised stock exchanges in India. Introduced to curb tax evasion and improve transparency, STT is collected at the time of each transaction and varies based on the type of trade and instrument. It directly increases the transaction cost for traders and investors, especially those active in derivatives, as the tax is charged on the traded value or premium, impacting overall post-tax returns.

The sharp reaction was largely driven by an immediate repricing of derivatives strategies rather than a deterioration in India’s macro or earnings outlook. Traders, arbitrageurs, and high-frequency participants were the first to unwind positions as transaction costs rose sharply. Analysts believe once this mechanical adjustment settles, markets are likely to refocus on fundamentals such as earnings visibility, fiscal prudence, and the record capex push outlined in the Budget.

Aakash Shah, Technical Research Analyst at Choice Equity Broking, noted, "However, for long-only, fundamentally driven FPIs, the STT hike is unlikely to be a deal-breaker. Their investment decisions are more influenced by earnings visibility, currency stability, and policy predictability." He added in his assessment that while higher transaction costs may reduce tactical participation and nudge some global allocators toward other Asian markets at the margin, sustained foreign flows will depend far more on macro stability, rupee movement, and tax policy consistency.

The Budget’s macro framework continues to reassure long-term investors. With a fiscal deficit target of 4.3% for FY27 and a record ₹12.2 lakh crore capital expenditure allocation, the government reinforced the ongoing investment cycle across infrastructure, capital goods, and manufacturing.

Prasenjit Paul, Equity Research Analyst at Paul Asset & Fund Manager at 129 Wealth Fund, said, “The stock market has reacted negatively to the STT hike on F&O (up to 0.05%) and the new tax treatment for buybacks, triggering a sharp intraday sell-off in the Nifty and Sensex.” He emphasised that despite the near-term volatility, the Budget remains structurally sound, supported by fiscal consolidation, infrastructure risk guarantees, and asset monetisation measures aimed at crowding in private capital and sustaining earnings momentum.

Market veterans also described the fall as a knee-jerk reaction rather than a structural shift.

Dhiraj Relli, MD & CEO, HDFC Securities, observed, "The immediate correction appears to be a knee-jerk response. I remain confident that investors should maintain their market participation, focusing strategically on sectors with strong earnings visibility." He pointed out that the finer details of the Budget contain multiple provisions that will become more apparent over time and collectively support sustainable growth through FY27, even if the enhanced STT regime creates short-term headwinds.

As the dust settles, experts expect the market narrative to shift back to earnings growth, government capex momentum, and macro stability. Historically, policy-led volatility has often been followed by recoveries once traders adjust to new cost structures and long-term investors reassert their focus on fundamentals.

With fiscal credibility intact, reforms in bond markets, improved foreign investment access, and continued infrastructure push, the broader equity story remains well supported. The immediate fall appears to be a reaction to higher transaction costs in derivatives rather than any change in India’s structural growth outlook, suggesting that the correction may indeed prove short lived.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.

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