Union Budget 2026 | STT on Futures hiked by 150%; Options by 50%; markets tank

New Delhi: Finance Minister Nirmala Sitharaman on Sunday proposed an increase in the Securities Transaction Tax (STT) on derivatives, a move aimed at curbing excessive speculation in the futures and options (F&O) segment.

In her Budget speech for 2026-27, Sitharaman said the STT on futures contracts would be raised to 0.05 per cent from 0.02 per cent.

"STT on options premium and exercise of options are both proposed to be raised to 0.15 per cent from the present rate of 0.1 per cent and 0.125 per cent respectively," she said.

Additionally, the government will tax buyback proceeds for all types of shareholders as capital gains, Sitharaman said.

The hike in STT is aimed squarely at high-volume derivative trading, rather than the cash equity market, and is expected to meaningfully increase transaction costs for active and short-term trading strategies.

Market experts believe that the move could help discourage excessive speculative activity and promote a more balanced market structure. However, some caution that it may weigh on foreign portfolio investor (FPI) participation in the near term.

"The increase in STT, particularly in futures and options, is likely to act as a marginal negative for FPI flows, especially for high-frequency and derivative-focused global funds," said Aakash Shah, Technical Research Analyst at Choice Equity Broking.

Following the hike, Sensex plunged 2,370.36 points, or 2.88 per cent, to slip below the 80,000-mark to 79,899.42 during the afternoon trade. The 50-share NSE Nifty tanked 748.9 points, or 2.95 per cent, to 24,571.75. Later, the matket bounced back.

FPIs have already remained cautious, with equity outflows of over Rs 41,000 crore in January 2026, amid global risk-off sentiment, elevated US bond yields, and currency pressures. In this environment, higher STT further compresses post-tax returns, making India relatively less attractive for short-term and derivative-oriented foreign investors, Shah said.

That said, the impact on long-only, fundamentally driven FPIs is expected to be limited. Their investment decisions are more closely linked to earnings visibility, currency stability, and policy predictability. However, at the margin, higher transaction costs could prompt some global allocators to favour other Asian markets, particularly as capital flows increasingly towards the US, Taiwan, and South Korea on the back of AI-led investment themes.

According to Shripal Shah, MD & CEO, Kotak Securities, 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," he said.

Divam Sharma, Co-founder and Fund Manager at Green Portfolio PMS, said the increase, while modest, signals a policy intent to monitor speculative activity through calibrated measures rather than abrupt intervention.

"From a brokerage economics standpoint, the immediate impact appears limited and unlikely to materially alter business models. The key variable will be the incremental tax revenue generated from derivatives volumes, which will become clearer over the coming quarters," he said.

Sharma added that given strong liquidity and structural growth in market participation, the STT hike is unlikely to act as a lasting deterrent for active F&O investors, but it does underscore the regulator's focus on containing leverage and speculative excess while ensuring orderly market development.