The hike in securities transaction tax (STT) on futures and options (F&O) trading, announced by Finance Minister Nirmal Sitharaman in Budget 2026, is set to come into effect from April 1, 2026, with the beginning of the new financial year.
The government said the STT hike is aimed at protecting small investors from speculative losses rather than driving central revenues. Various studies in the past have shown that 90% of people tend to lose money in the F&O market.
Therefore, in order to curb this speculative trading and protect the interests of the larger public, the government announced an increase in STT on futures contracts to 0.05% from 0.02%. STT on options premium and exercise of options will rise to 0.15% from the present rate of 0.1% and 0.125%, respectively.
The STT hike targets only the F&O, with no impact on equity delivery and intraday trading.
The increase is largely concentrated in the derivatives segment, where trading volumes are driven by high churn and leveraged strategies, said Harshal Dasani, Business Head at INVasset PMS.
STT hike impact: Volumes to take a hit
According to experts, the F&O volumes, especially high-frequency and intraday trades, could see a dip in the short term, as costs rise and breakeven points shift.
“Since STT is levied on turnover rather than profits, higher costs directly impact trader profitability by raising breakeven levels. This could lead to a moderation in intraday and F&O volumes as speculative activity becomes less attractive,” Dasani opined.
Furthermore, the STT hike may reduce liquidity, widen spreads, and slightly pressure cash market arbitrage, said Santosh Meena, Head of Research at Swastika Investmart.
That said, analysts do not see any impact in the long term. “Long-term, volumes could stabilise as traders shift to lower-frequency strategies. Overall market sentiment sees mild near-term caution, but no broad equity sell-off,” he opined.
Double-whammy for traders?
The STT hike’s timing could add further pressure on the stock market traders, reeling from the impact of the US-Iran war. The Indian stock market is already volatile due to geopolitical tensions and elevated crude prices, with the STT hike expected to further compress margins.
Dasani said it will effectively force traders to become more selective and reduce excessive leverage. “In that sense, it does act as a double whammy—tightening profitability precisely when market conditions are already uncertain, and risk appetite is under strain.”
The ongoing US-Iran war has entered its fifth week and has already caused 10% decline in the Nifty index in March. High volatility (elevated VIX), FII outflows, rupee weakness, and surging oil prices are acting as headwinds. Against this backdrop, higher STT adds direct cost pressure exactly when margins are squeezed by geopolitical risk, likely accelerating the decline in retail F&O activity and compounding liquidity challenges for active traders, said Meena.
Long-term investors, though, remain largely insulated, said experts.
The number of unique individual investors trading in the equity derivatives (F&O) segment was 1.06 crore in FY25, which dropped to about 75.43 lakh in FY26 (up to December 30, 2025), according to a PTI report.
Alongside the government, Sebi has rolled out a series of measures to strengthen stability in the derivatives market, such as rationalising weekly contracts, increasing lot sizes, tightening margin norms, mandating upfront option premium collection, withdrawing calendar spread benefits on expiry day, and introducing intraday position limit monitoring.
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