India's benchmark indices S&P BSE Sensex and NSE Nifty 50 witnessed a sharp sell-off following the Union Budget 2026 presentation, as investors reacted negatively to changes in taxation on derivatives trading and share buybacks. The reaction was swift and broad-based, wiping out pre-Budget optimism and pushing key indices deep into the red.

STT hike on futures and options

The most immediate trigger for the market downturn was the increase in Securities Transaction Tax (STT). The government raised STT on futures contracts to 0.05% from 0.02%, while STT on options premiums was increased to 0.15% from 0.10%.

Market participants viewed the move as an attempt to curb excessive speculation in the rapidly expanding derivatives segment. However, traders and brokers warned that the higher levy could significantly impact volumes, especially among retail traders and high-frequency participants operating on thin margins.

Brokerage stocks and exchange-linked companies bore the brunt of the reaction, with Angel One and BSE falling in over 10%.

Benchmark indices declined sharply during the session. The Nifty 50 fell nearly 2%, while the BSE Sensex dropped close to 1.8%, dragged down by heavyweights across banking, energy and financial services.

Market breadth weakened, with selling pressure visible across large-cap, mid-cap and small-cap stocks. Analysts said that the decline was not sector-specific but reflected a broader reassessment of risk following the tax announcements.

Buyback taxation changes

Adding to the negative sentiment was the government’s decision to change the tax treatment of share buybacks. Under the revised framework, buyback proceeds will now be taxed as capital gains in the hands of shareholders, removing earlier tax arbitrage benefits.

While the move aims to bring parity across different classes of investors and plug revenue leakages, market participants were concerned that it could reduce the attractiveness of buybacks as a capital-return mechanism, particularly for promoter-driven companies.

Concerns over liquidity

Analysts cautioned that the combined impact of higher STT and revised buyback taxation could weigh on liquidity, at least in the short term. Higher transaction costs may discourage frequent trading, while companies could rethink capital allocation strategies.