STT Hike: A Shock Tax Increase
Finance Minister Nirmala Sitharaman delivered a major blow to derivatives traders on February 1, 2026, announcing a steep increase in Securities Transaction Tax (STT) on both futures and options in Union Budget 2026-27. The STT on futures trading was raised to 0.05% from 0.02%—a massive 150% increase—while the STT on options was hiked to 0.15% from the current rates of 0.10% on options premium and 0.125% on exercise of options.
The announcement triggered an immediate and dramatic market reaction, with shares of stock exchanges and brokerage firms plunging up to 15% as investors reacted to the prospect of sharply higher transaction costs dampening derivatives trading volumes. BSE shares fell to as low as Rs 2,517.30, while Angel One declined to Rs 2,284.70, and Groww also witnessed significant selling pressure.
The broader Sensex slumped by 2,800 points on Budget day, partly driven by anxiety over the STT hike’s impact on trading activity and market liquidity.
The STT Increases: Breaking Down the Numbers
Futures Trading: A 150% Tax Jump
The most dramatic increase came in futures trading, where STT was raised from 0.02% to 0.05% of the traded value.
Futures STT Evolution:
- Budget 2024: Increased from 0.0125% to 0.02% (60% hike)
- Budget 2026: Increased from 0.02% to 0.05% (150% hike)
- Total increase since 2023: From 0.0125% to 0.05% (300% increase)
Impact Example:
For a futures contract worth Rs 10 lakh:
- Old STT (0.02%): Rs 200
- New STT (0.05%): Rs 500
- Additional cost per transaction: Rs 300 (150% increase)
For active traders executing multiple contracts daily, this cost escalation becomes substantial and can significantly erode profitability.
Options Trading: A 50% Increase
Options trading also faced a steep hike, though structured slightly differently due to the two components of options STT:
Options Premium STT:
- Budget 2024: Increased from 0.0625% to 0.10% (60% hike)
- Budget 2026: Increased from 0.10% to 0.15% (50% hike)
Options Exercise STT:
Impact Example:
For an options contract with a premium of Rs 1 lakh:
- Old STT (0.10%): Rs 100
- New STT (0.15%): Rs 150
- Additional cost per transaction: Rs 50 (50% increase)
Government’s Stated Rationale
Finance Minister Nirmala Sitharaman explicitly stated the dual objectives behind the STT hike:
- “Measured course correction in the F&O segment”: To moderate excessive speculative activity that has surged in recent years
- “Generate additional revenue for the government”: To augment tax collections amid fiscal consolidation pressures
The government’s intent appears to be volume moderation rather than revenue maximization, as industry experts note that potential revenue gains could be offset by lower derivative volumes resulting from the higher costs.
Market Reaction: Brokerage and Exchange Stocks Crash
The Immediate Carnage
The Budget announcement triggered panic selling in stocks directly exposed to derivatives trading volumes:
Stock Performance on Budget Day:
- BSE: Plunged up to 15%, touching Rs 2,517.30
- Angel One: Fell 10-13%, declining to Rs 2,284.70
- Groww: Tanked up to 10%
- MCX: Also witnessed significant selling
These companies derive substantial revenues from derivatives trading, with F&O (futures and options) volumes forming a key revenue driver for stock exchanges and retail brokerages.
Why These Stocks Are Most Vulnerable
Stock Exchanges (BSE, NSE):
Stock exchanges earn transaction fees on every trade executed on their platforms. Derivatives trading—particularly in index futures and options—generates massive daily volumes and corresponding fee income. A sharp reduction in F&O volumes directly impacts exchange revenues.
Discount Brokerages (Angel One, Groww, Zerodha):
Retail brokerages have witnessed explosive growth in recent years, fueled largely by the surge in retail participation in derivatives markets. Many first-time investors are drawn to F&O trading, and this segment contributes disproportionately to brokerage revenues despite the risks involved.
The steep increase in STT on futures and options is likely to:
- Raise impact costs for traders, hedgers, and arbitrageurs
- Cool derivative activity and lead to reduction in volumes
- Directly impact the revenue models of brokerages dependent on high-frequency F&O trading
Understanding STT: History and Evolution
What is Securities Transaction Tax?
Securities Transaction Tax (STT) is a tax imposed on the value of securities transactions conducted on recognized stock exchanges in India. It applies to trades in:
- Equity shares
- Equity mutual funds
- Futures contracts
- Options contracts
Key Characteristics:
- Collected at transaction: STT is levied when the transaction occurs, regardless of whether the investor makes a profit or loss
- Non-refundable: Unlike other taxes, STT cannot be reclaimed even if the trade results in a loss
- Automatic deduction: Collected by the exchange and remitted to the government
The 2004 Introduction: Replacing LTCG
STT was introduced in India on October 1, 2004, by then-Finance Minister P. Chidambaram. The primary objectives were to:
- Replace long-term capital gains (LTCG) tax: STT was meant to substitute for LTCG taxation on equity investments
- Curb tax evasion: Stop widespread evasion in equity and derivatives trades
- Simplify tax collection: Create an automatic, transaction-based tax system
At introduction, the trade-off seemed reasonable: investors paid a small transaction tax but enjoyed tax-free long-term capital gains, provided STT had been paid on acquisition and sale.
The 2018 Double Taxation: LTCG Returns
However, Union Budget 2018 fundamentally changed this equation by reintroducing LTCG tax on listed equities while keeping STT in place.
The New Regime (from April 1, 2018):
- LTCG tax: 10% on gains exceeding Rs 1 lakh (later increased to 12.5% in Budget 2024)
- STCG tax: 15% (later increased to 20% in Budget 2024)
- STT: Continued to be levied on all transactions
This created a double taxation scenario that has been a consistent source of investor grievance. Investors now pay:
- STT on every transaction (whether profitable or not)
- Capital gains tax on profitable trades
- Potentially both together on the same transaction
Budget 2024: The First Major Hike
Budget 2024 delivered a 60% increase in STT on options and futures:
- Options: From 0.0625% to 0.10% (60% hike)
- Futures: From 0.0125% to 0.02% (60% hike)
Simultaneously, capital gains taxes were also increased:
- LTCG: From 10% to 12.5%
- STCG: From 15% to 20%
Brokerages and asset managers warned that the cumulative effect dampens the appeal of equity-linked products, especially for active traders.
Industry Reaction: Disappointment and Concern
Pre-Budget Expectations: Reduction Hopes Dashed
In November 2025, Finance Minister Sitharaman held a pre-budget consultation meeting with the capital market industry. According to sources who spoke to CNBC-TV18, the proposals reflected long-standing concerns regarding:
- Liquidity challenges
- Tax parity between cash and derivatives markets
- Investor efficiency
Top Priority: STT Reduction
A reduction in STT, especially on cash market trades, topped the industry’s agenda. Market participants specifically requested that STT on equity cash trades be kept meaningfully lower than derivatives to:
- Restore balance between the two segments
- Help revive market depth
- Encourage long-term investment over speculative trading
Instead of a reduction, Budget 2026 delivered another steep increase, disappointing the industry.
Expert Analysis: Volume Moderation, Not Revenue Gain
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.”
Ritvik Dashora, CFA, CEO of Tradomate:
“In capital markets, higher STT on futures and options appears to be a deliberate attempt to curb excessive retail speculation and improve market quality. The trade-off could be lower volumes and near-term pressure on the markets.”
Prasenjit Paul, Equity Research Analyst:
“These measures raise transaction costs and change the near-term economics for both traders and companies relying on buybacks as a capital-return tool.”
The consensus among market professionals is clear: the government is prioritizing market quality and speculation control over short-term revenue maximization.
Nithin Kamath’s Warning: The Revenue Shortfall Reality
The Zerodha Founder’s Prescient Concerns
Zerodha co-founder Nithin Kamath has been one of the most vocal critics of rising STT, recently raising fresh concerns about the tax’s counterproductive effects.
In a post on X (formerly Twitter), Kamath highlighted the fundamental problem: STT was introduced when LTCG was scrapped, but after LTCG tax returned, the overall tax burden on investors has significantly increased.
The FY26 Revenue Shortfall
Kamath’s analysis revealed a stark reality about the Budget 2024 STT hike’s impact:
FY26 Projected STT Collections: Rs 78,000-80,000 crore
Actual Collections (as of January 1, 2026): Rs 45,000 crore
Expected Collections by March 31, 2026:
- Additional collections: Rs 12,000 crore
- Total FY26 collections: Rs 57,000 crore
- Shortfall from projections: 25% (Rs 21,000 crore less than budgeted)
The Laffer Curve in Action
Kamath’s key insight: “The Centre would have collected a lot more if it wasn’t for the 2024 hike”.
This represents a classic case of the Laffer Curve principle—beyond a certain point, higher tax rates actually reduce total tax revenue because they suppress the taxable activity. The 60% STT hike in Budget 2024 appears to have crossed this threshold.
Why Collections Fell:
Initially, the Budget 2024 STT hike “did not have much impact on trading volumes as the bull market had continued and participation kept increasing”. However, “markets do not always remain bullish, and the real impact of higher taxes had become visible over the past year”.
The Volume Collapse:
Kamath noted that across brokers, there’s been “more than 30% drop in activity,” with Zerodha experiencing “degrowth in business for the first time since we started 15 years ago”.
This drying up of volumes demonstrates how shallow the Indian markets still are, with activity concentrated among just 1-2 crore traders. When transaction costs rise significantly, many of these marginal traders simply exit the market, causing volumes and revenues to collapse.
The Budget 2026 Paradox
Given this clear evidence that the 2024 STT hike underperformed revenue projections, Budget 2026’s decision to impose an even steeper increase appears paradoxical from a revenue perspective.
However, if the government’s true intent is volume moderation and curbing speculation rather than revenue maximization, the move makes strategic sense—albeit at the cost of brokerage industry revenues and market liquidity.
Broader Market Impact: Beyond Brokerages
The Sensex Slump
The broader market also reacted negatively to Budget 2026, with the Sensex slumping 2,800 points on Budget day. While multiple factors contributed to this decline, the STT hike on derivatives played a significant role by:
- Increasing uncertainty about future trading volumes
- Raising concerns about market liquidity
- Signaling regulatory intent to cool speculative activity
Impact on Different Market Participants
Retail Traders:
The biggest losers from the STT hike are active retail traders who execute multiple F&O trades daily. For them, the cumulative transaction costs can quickly erode profits, making many trading strategies unviable.
Institutional Investors and Hedgers:
Professional investors who use derivatives for hedging and risk management also face higher costs, though the impact is proportionally smaller given their larger trade sizes and different objectives.
Long-term Investors:
Cash market investors focused on long-term equity holdings are less directly impacted, as STT on delivery-based equity transactions remains at 0.1% on both buy and sell sides.
Conclusion: A Deliberate Cooling of Speculation
Budget 2026’s STT hike on futures (150% increase to 0.05%) and options (50% increase to 0.15%) represents a bold policy intervention aimed at moderating India’s red-hot derivatives market. Despite clear industry appeals for STT reduction and evidence from FY26 that the previous year’s 60% hike led to a 25% revenue shortfall, Finance Minister Sitharaman doubled down with an even steeper increase.
The immediate market reaction—with brokerage and exchange stocks crashing up to 15% and the Sensex plunging 2,800 points—underscores the significance of this tax policy shift. As Nithin Kamath and other industry leaders have warned, the cumulative burden of STT plus capital gains taxes may drive many traders out of the market entirely, reducing volumes and potentially creating a revenue collection shortfall even larger than FY26’s projected 25% gap.
Yet if the government’s true objective is to curb excessive retail speculation and improve market quality rather than maximize short-term revenue, the STT hike—however painful for brokerages—may succeed in creating a more sustainable, less speculative equity market ecosystem in the long run. The coming months will reveal whether this regulatory gamble pays off or simply drives trading activity further underground or to less-regulated platforms.