STT Hike Explained: Why Has Government Raised F&O Taxes That Spooked Indian Markets?

The decision to raise Securities Transaction Tax (STT) on futures and options (F&O) is intended to discourage speculative tendencies and handle systemic risk in the derivatives market, said Revenue Secretary

Arvind Shrivastava said on Sunday. He added that the volume of F&O transactions is largely in the realm of heavy speculation, which results in losses to small investors.

The Union Budget 2026-27 has proposed an increase in the STT on futures contracts to 0.05 per cent from 0.02 per cent. STT on options premium and exercise of options are proposed to be raised to 0.15 per cent from the present rate of 0.1 per cent and 0.125 per cent, respectively.

“The primary objective of raising STT has been that it is felt that when you look at the volume of transactions in futures and options, whether you compare it to the size of GDP or the size of the underlying securities, it is largely in the realm of heavy speculation, which results in losses to small, retail, unsophisticated investors, and the government’s intention is to discourage speculative tendencies, and the increase in rates is essentially in that direction. It is meant to handle the systemic risks in the derivatives market. Even after this increase, the rates of STT will remain modest compared to the volume of transactions that is happening,” Revenue Secretary Arvind Shrivastava said while addressing the post-Budget conference.

Markets Spooked After STT Hike

Indian equity markets saw a sudden and sharp intraday sell-off on Sunday, February 1, shortly after Finance Minister Nirmala Sitharaman presented her ninth consecutive Union Budget, outlining steps aimed at boosting growth while maintaining fiscal discipline.

The Sensex plunged more than 2,300 points from the day’s high, while the Nifty 50 slipped to 24,571.75 following the announcement of a hike in the Securities Transaction Tax (STT).

The Sensex crashed 1,547 points, or 1.88%, to close at 80,722.94, while the Nifty 50 dropped 495 points, or 1.96%, to close at 24,825.45.

The primary trigger behind the abrupt market fall is the proposed increase in STT.

STT is a tax imposed by the Indian government on the purchase and sale of securities traded on recognised stock exchanges in India.

What Experts Say

Feroze Azeez, Joint CEO, Anand Rathi Wealth Limited, said, “The increase in STT on futures and options significantly raises transaction costs for derivatives traders, particularly impacting high-frequency traders, arbitragers and Hedgers (thereby impacting their strategies). This could lead to lower derivative volumes and near-term volatility in the markets. While the move is positive from a government revenue perspective, brokerage houses may see pressure on transaction-led earnings, and markets could face some immediate downside as participants adjust to higher costs.”

Shripal Shah, MD & CEO, Kotak Securities, said, “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.”

Sonam Srivastava of Wright Research PMS further explained that this matters less for immediate flows and more for structure, from a market’s perspective.

“PROI investors tend to be long-term, often with personal or economic links to India, and their capital is typically stickier than hot money flows. Increasing the aggregate cap from 10% to 24% meaningfully expands headroom, especially in mid- and large-cap names where foreign ownership limits often become binding constraints. Over time, this can improve liquidity, reduce volatility at the margin, and support better price discovery,” she added.