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The Union Budget has proposed a sharp increase in Securities Transaction Tax (STT) on futures and options trading. The government said the move is aimed at discouraging excessive speculation in derivative markets and protecting small retail investors from heavy losses.

Finance Minister Nirmala Sitharaman said the decision to raise STT on futures and options was intended to curb speculative activity and reduce systemic risk in the capital markets. Clarifying the proposal, the finance ministry said the revised STT rates apply only to derivatives, while all other STT rates remain unchanged.

According to the ministry, the volume of futures and options trading has grown disproportionately compared to the size of the economy and the underlying cash market. It said a large part of this trading activity is speculative in nature and does not reflect genuine hedging needs.

“The volume of futures and options trading has grown disproportionately compared to the size of the economy and the underlying cash market, and much of it is like heavy speculation,” the finance ministry said.

The Budget has proposed a significant hike in STT on futures and options contracts. STT on futures contracts has been raised to 0.05 per cent from 0.02 per cent. STT on options premium has been increased to 0.15 per cent from 0.1 per cent. STT on the exercise of options has been raised to 0.125 per cent from the current rate.

The increase represents a 150 per cent hike in STT on futures and a 50 per cent rise in STT on options premiums. The government said that even after the increase, STT rates remain modest relative to the overall transaction volumes in the derivatives market.

The finance ministry said speculative trading in derivatives often results in losses for small and unsophisticated retail investors. It added that discouraging such behaviour is necessary to address systemic risks in derivative markets.

“The intent is to discourage speculative tendencies and address systemic risk in derivative markets,” the ministry said, adding that the revised rates are focused specifically on high-volume derivative trading rather than the cash equity market.

Revenue Secretary Arvind Shrivastava, addressing the post-Budget press conference, said speculative trading in futures and options was resulting in losses for small and retail investors.

“The government intends to discourage speculative tendencies, and the rate increase is essentially in that direction. So, it is meant to essentially handle the systemic risk in derivative markets,” Shrivastava said.

He added that even after the increase, STT rates would remain modest when compared to the volume of transactions taking place in the derivatives segment.

The Securities and Exchange Board of India (SEBI) has repeatedly flagged concerns over speculative activity in the futures and options segment. According to studies cited by the government, over 90 per cent of retail investors’ trades in the F&O segment result in losses.

A recent SEBI study covering FY22 to FY24 found that approximately 93 per cent of individual traders in the equity F&O segment incurred significant losses. Despite consecutive years of losses, more than 75 per cent of loss-making traders continued to trade in the segment. Aggregate losses of individual traders exceeded Rs 1.8 lakh crore during the three-year period.

The latest SEBI report for FY25 shows that losses have widened further. Net losses incurred by individual traders in the equity derivatives segment rose to Rs 105,603 crore, a 41 per cent increase compared to Rs 74,812 crore in FY24. Over 91 per cent of traders made losses, broadly consistent with previous years.

The study included the top 13 stock brokers with a combined client base of around 96 lakh unique traders in the F&O segment. While the number of unique individual traders declined from 61.4 lakh in the first quarter of FY25 to 42.7 lakh in the fourth quarter, this reduction was attributed to SEBI’s measures to curb speculation, including limiting weekly expiries and increasing lot sizes.

SEBI noted that during the first three quarters of FY25, aggregate net losses and average net loss per trader were rising. However, in Q4 FY25, losses for individual traders declined. Over the last six months, the overall number of unique F&O traders fell by 20 per cent compared to the previous year. Traders with a total turnover of less than Rs 1 lakh also witnessed a significant decline.

“From December 2024 to May 2025, the average daily traded value by individual investors in EDS witnessed a decline of 11 per cent compared to the same period the previous year, but it showed a growth of 36 per cent compared to the same period two years ago,” SEBI said.

The SEBI study found that losses were particularly severe among a small group of traders. The top 3.5 per cent of loss-makers, representing around 4 lakh traders, suffered an average loss of Rs 28 lakh per person over the three years, inclusive of transaction costs. Only 1 per cent of individual traders managed to earn profits exceeding Rs 1 lakh after accounting for transaction costs.

In contrast, proprietary traders and Foreign Portfolio Investors (FPIs) recorded gross trading profits of Rs 33,000 crore and Rs 28,000 crore, respectively, in FY24, before transaction costs. Most of these profits were generated by larger entities using trading algorithms, with 97 per cent of FPI profits and 96 per cent of proprietary trader profits attributed to algorithmic trading.

On average, individual traders spent around Rs 26,000 per person on F&O transaction costs in 2023-24. Over three years, individuals collectively spent about Rs 50,000 crore on transaction costs, with brokerage fees making up around 51 per cent and exchange fees about 20 per cent.

High transaction costs, combined with speculative trading, have made F&O trading risky for small and retail investors.

The SEBI study also highlighted a sharp rise in young traders. The proportion of traders below 30 years increased from 31 per cent in 2022-23 to 43 per cent in 2023-24. Individuals from Beyond Top 30 (B30) cities accounted for over 72 per cent of the total F&O trader base. More than 75 per cent of individual F&O traders in 2023-24 had declared an annual income of less than Rs 5 lakh.

Index options turnover has declined year-on-year in FY25, with a 9 per cent fall in premium terms and a 29 per cent fall in notional terms. However, compared to two years ago, index options volume rose 14 per cent in premium terms and 42 per cent in notional terms.

Overall, these trends indicate that while the number of active retail traders is declining, the volume of trades by remaining participants remains significant.

Following the announcement of the STT hike, markets saw sharp volatility. During afternoon trade, the Sensex plunged 2,370.36 points, or 2.88 per cent, to fall below the 80,000 mark at 79,899.42. The Nifty dropped 748.9 points, or 2.95 per cent, to 24,571.75. Markets later recovered some losses.

At close, the BSE Sensex fell 1,546.84 points to 80,722.94, while the Nifty slipped 495.20 points to 24,825.45.