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The proposal in the Union Budget 2026-2027 to increase the Securities Transaction Tax (STT) on futures and options (F&O) transactions rattled the Indian stock market investors, triggering a nearly 2% decline in the benchmark indices, Sensex and Nifty 50.

In her Budget speech, Finance Minister Nirmala Sitharaman announced a sharp hike in STT - by a massive 150% on futures transactions and 50% on options transactions. STT on futures has been raised to 0.05% from 0.02%, while the levy on options transactions has been increased to 0.15% from 0.01% earlier.

Addressing the post-Budget press conference, Sitharaman said the higher STT on derivatives was aimed at deterring small investors from engaging in speculative trades that often result in losses. Revenue Secretary Arvind Shrivastava echoed this view, stating that the measure was intended to curb excessive speculation and address systemic risks in the derivatives market.

“The government’s intention is to discourage speculative tendencies, and the increase in rates is in that direction. It is meant to handle systemic risk in the derivatives market,” Shrivastava said. He added that even after the revision, STT rates would remain modest relative to the overall transaction volumes in the F&O segment.

The move has elicited mixed reactions from market participants, with several industry leaders taking to social media platform X to voice their views.

Porinju Veliyath, Founder and CEO of Equity Intelligence India, criticised the decision, arguing that a second hike in STT — at a time when trading profits are already taxed at higher rates — could further dampen trader sentiment. He said the move appeared designed to discourage trading activity and could worsen overall market sentiment.

In contrast, veteran investor Shankar Sharma welcomed the proposal, strongly endorsing the government’s intent. In a post on X, Sharma described derivatives trading as deeply harmful, arguing that it leads to wealth destruction among retail participants and disproportionately benefits specialised F&O brokers. While acknowledging that derivatives cannot be eliminated, he said taxing them heavily was justified.

“I love this Budget for ONE major reason: hiking of STT on derivatives. Derivatives are a poison x cocaine, eating away at the roots of our youth. Its destructive effect will be felt by generations. It’s a pure wealth transfer from the traders to F&O specialist brokers, who have been massive winners of this drug + gun trade. (Not their fault). F&O adds zero value to India. It deducts inestimable value. It can’t be stopped but it can be taxed the hell out of. Kudos to the Finance Minister,” Sharma said in a post on X.

Varinder Bansal, Founder, Omkara Capital criticized the move saying that “everything was so great in the budget, barring one STT increase which was not required at the current times.”

“Increase in STT but govt treats F&O like sin goods (rightly so but plz do consider incentivising long-term investors by cutting LTCG/STCG),” he noted.

Meanwhile, according to studies by Sebi, over 90% of retail investors’ trades in the F&O segment lead to losses, and the capital markets regulator has also taken steps to reduce volumes in the past.

Deepak Shenoy, Founder of Capitalmind, said the impact on retail traders is likely to be limited, with arbitrage funds emerging as the biggest affected segment.

“The STT increase is not of major impact to retail players. The biggest players in futures are arb funds. Your arb fund returns will fall by about 0.5% next year due to this increased STT,” Shenoy said.

He further noted that foreign portfolio investors (FPIs) often buy stocks through the futures market as impact costs are lower than in the cash segment, allowing positions to expire and convert into stock holdings. “With the STT hike, this strategy becomes costlier, with futures trades now carrying an additional cost of around 4 basis points,” Shenoy said.

Varinder Bansal, Founder of Omkara Capital, offered a more balanced view, stating that while the Budget was largely positive, the STT hike was unnecessary in the current environment. He added that if derivatives are being treated as “sin goods,” the government should also consider incentivising long-term investing by reducing long-term and short-term capital gains taxes.

Meanwhile, data from the Securities and Exchange Board of India (Sebi) shows that over 90% of retail investors incur losses in the F&O segment. The market regulator has previously introduced multiple measures to curb excessive derivatives trading and protect retail investors.

Read Stock Market Highlights on Budget Day here

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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