In a blow to the futures and options (F&O) traders in the Indian stock market, Finance Minister Nirmala Sitharaman on Sunday, February 1, announced a hike in the Security Transaction Tax (STT) for the equity derivatives segment. In her Budget 2026 speech, Sitharaman proposed to increase STT by a massive 150% on futures transactions and by 50% on options transactions.
As per the Budget proposal, STT on futures will be hiked to 0.05% from 0.02% at present, and STT on options transactions will be raised to 0.15% from 0.1% earlier.
“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 Nirmala Sitharaman in her Budget 2026 speech.
The announcement shook Dalal Street, and Sensex crashed more than 2,000 points, while Nifty 50 slipped below the 24,600 level during intraday deals.
Here’s a look at what STT is and how it affects F&O traders and equity investors.
What is STT in stock market?
Securities Transaction Tax is a direct tax levied by the government on every purchase and sale of securities, such as equity shares, futures, and options, on recognised stock exchanges.
STT was introduced on October 1, 2004, with an aim to reduce speculation, generate revenue, and track transactions for capital gains taxation. STT is deducted upfront at the time of trades, regardless of the investor making a profit or loss. However, in the Union Budget 2018, LTCG was reintroduced on listed equities, while STT remained in place.
STT on F&O transactions has been raised today in Budget 2026.
STT Hike Impact on Traders
F&O traders face the steepest hit due to high volumes and thin margins. The STT hike raises transaction costs — e.g., ₹10,000 extra on ₹1 crore futures turnover — eroding profits, curbing high-frequency trading, and forcing reduced leverage or fewer trades.
“The steep increase in STT on futures and options, coming on top of last year’s hike, is likely to raise impact costs for traders, hedgers, and arbitrageurs. This could cool derivative activity and lead to a reduction in volumes. The intent appears to be volume moderation rather than revenue maximisation, as any potential revenue gain could be offset by lower derivative volumes,” said Shripal Shah, MD & CEO, Kotak Securities.
Jimeet Modi, Founder and CEO of SAMCO Group, said the hike in securities transaction tax (STT) is not a minor technical adjustment but one that alters market microstructure.
“The impact chain is critical: higher STT on derivatives leads to lower derivatives volumes, which in turn dampens cash market activity, reduces overall liquidity, and raises the liquidity premium demanded by global investors. This ultimately increases India’s cost of capital and encourages a gradual reallocation of capital to competing markets such as the US, ASEAN economies and other emerging markets. At a time when India needs to deepen market liquidity and attract global flows, raising frictional trading costs sends a counterproductive signal,” Modi said.
He added that derivative markets are not merely speculative platforms but function as liquidity engines and risk-transfer mechanisms that underpin price discovery in the cash market. “Weakening this ecosystem can have second-order effects on valuation multiples, fundraising conditions and long-term capital formation,” he noted.
“While the Budget prioritises stability and protects the sovereign balance sheet, it underdelivers on strengthening India’s position as a globally competitive capital market. In essence, stability has been delivered, but market competitiveness has been compromised,” Modi said.
STT Hike Impact on FPI
Analysts believe that the hike in STT for F&O transactions can negatively affect the flow of foreign portfolio investors (FPIs) who may tend to shift capital towards other emerging markets.
FPIs have remained net sellers in the Indian stock market, with equity outflows of over ₹41,000 crore in January 2026 alone, reflecting global risk-off sentiment, elevated US bond yields, and currency pressures.
“In this context, 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. Their investment decisions are more influenced by earnings visibility, currency stability, and policy predictability,” said Aakash Shah, Technical Research Analyst at Choice Equity Broking.
He added that 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.
“Overall, while the STT hike may help boost tax collections, it risks dampening trading volumes and could slow tactical FPI participation. 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,” said Shah.
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