Union Budget 2026 | STT hike aimed at lowering F&O volumes a 'dampener' for capital markets: Brokerages

Mumbai/New Delhi: The provision to raise the Securities Transaction Tax (STT) in the latest annual budget, aimed at curbing volumes in the futures and options segment, is likely to be a "dampener" for the markets, brokerages said on Sunday.

"The proposed increased STT in F&O is a dampener for capital market entities in the short term, but may augur well in the long term," HDFC Securities' managing director and chief executive Dhiraj Relli said in a statement.

The move to hike the STT on the F&O segment was attributed as one of the key reasons that led to a sharp correction in the equity markets right after the budget speech by Union Finance Minister Nirmala Sitharaman. Specifically, the stocks of brokerages and also exchanges were trading in the red after the speech.

According to studies by SEBI, over 90 per cent of the retail investors' trades in the F&O segment lead to losses, and the capital markets regulator has also taken steps to reduce the volumes in the past.

Sitharaman announced the STT hikes, saying the move will "provide reasonable course correction" in the F&O segment in the capital market and generate additional revenues for the government.

She announced a proposal to raise the STT on Futures to 0.05 per cent from the present 0.02 per cent, while the STT on options premium and exercise of options to be raised to 0.15 per cent from the present rate of 0.1 per cent and 0.125 per cent, respectively.

Kotak Securities' managing director and chief executive, Shripal Shah said the steep increase in STT is likely to raise impact costs for traders, hedgers, and arbitrageurs.

"The intent appears to be volume moderation rather than revenue maximisation, as any potential revenue gain could be offset by lower derivative volumes," he added.

"Higher transaction costs are likely to reduce trading volumes, dampen short-term momentum, and lower profitability for active market participants," SAMCO Securities, a domestic brokerage, said in a note.

This will lead to a moderation in the foreign institutional investors in the derivatives market as post-tax trading efficiency declines, it said, warning that this can create a "cascading effect" on revenue streams of broking companies, exchanges, asset management companies, and depositories.

Shrikant Chouhan, Head Equity Research, Kotak Securities, said the hike in STT on equity F&O may cause short-term market discomfort.

"The treatment of buybacks as capital gains provides a meaningful offset and reinforces long-term investor confidence," he said. Anand James, Chief Market Strategist, Geojit Investments Ltd, said, "STT hike on the face of it, this is equity positive as option trades become more expensive." He further stated that at a portfolio level, the hit on the derivative segment could lead to rebalancing and drag the equity segment in the near term.

"But it is hard to say that the hike alone will dissuade the speculative interest tied to the derivatives market, especially the options," James added.

Mahavir Lunawat, Chairman & Managing Director, Pantomath Capital, said the adjustments in Securities Transaction Tax (STT) reflect a move toward market stability.

"The overall emphasis on digital integration and faster settlement processes makes our trading ecosystem more transparent and resilient. We are seeing the Indian markets evolve into a highly efficient, world-class platform," he said.

Narinder Wadhwa, MD & CEO, SKI Capital Services Ltd, said The tweak in STT and Commodities Transaction Tax (CTT) fits squarely within this philosophy.

"While it may lead to a moderation in derivatives volumes -- particularly in high-frequency and short-tenure contracts -- the move is not aimed at long-term or delivery-based investors, who remain largely unaffected," Wadhwa said.

He added that the measure reinforced the message that capital markets should facilitate investment, hedging and efficient price discovery, rather than excessive leverage-driven trading.

"For exchanges, brokers and other market intermediaries, the Budget may result in short-term pressure on derivatives-led revenues. However, over the medium to long term, it encourages a healthier market structure, pushing the ecosystem towards cash market depth, wealth management, advisory and long-term investor engagement," Wadhwa said.

Ashishkumar Chauhan, MD & CEO, NSE, said, the budget "deepens financial markets through calibrated measures -- higher STT on derivatives to curb excess speculation".

"Hike in STT on futures and options premium in the equity markets have also disappointed foreign investors as this will increase the transaction cost," said Anuj Choudhary, Research Analyst, Mirae Asset ShareKhan.

The 30-share BSE Sensex recovered from the day's lows hit right after the speech, and was trading 764.29 points or 0.93 per cent down at 81,505.49 points at 1442 hrs.