STT hike aims to curb speculation, but can it fix India’s derivatives problem?

The sharp hike in Securities Transaction Tax (STT) on derivatives announced in Budget 2026 is widely seen as the government’s attempt to cool India’s fast-growing futures and options (F&O) trading frenzy. By raising transaction costs from April 1, 2026, policymakers are betting that higher trading friction will curb excessive speculation, particularly among retail traders, and steer markets towards more sustainable participation.

Under the Budget proposals, the government has increased STT on equity futures to 0.05% from 0.02%, marking a 150% increase. STT on options premium has been raised to 0.15% from 0.10%, while the tax on exercised options has been raised to 0.15% from 0.125%. The move is aimed at moderating excessive speculative trading in the derivatives segment and boosting tax revenues.

However, STT on delivery-based equity trades in the cash market remains unchanged at 0.1%, ensuring continued support for long-term investors and stable market participation.

Govt pegs STT collections at ₹73,700 cr for FY27

Factoring in the proposed hike, the government has pegged its STT collection target at ₹73,700 crore for FY27. At the same time, it has trimmed its revised FY26 estimate to ₹63,670 crore, from the original ₹78,000 crore, amid slowdown in market activity. Actual STT collections in FY25 stood at about ₹52,197 crore, highlighting the persistent challenge of balancing revenue expectations with trading realities.

Data from the National Stock Exchange (NSE) shows that trading activity across both equity cash and derivatives segments cooled in 2025, weighed down by sustained foreign portfolio investor (FPI) outflows and tighter regulations in index options. Equity cash average daily turnover (ADT) fell 14.5% year-on-year to ₹99,622 crore, sliding from ₹1.13 lakh crore in April to ₹94,496 crore by December, signalling a normalisation after the post-pandemic surge.

The slowdown was even more visible in derivatives. Equity options ADT (premium) averaged ₹51,478 crore, down 24.6% YoY and marked by sharp intra-year swings, while equity futures ADT declined 18.2% YoY to ₹1.55 lakh crore, tapering from ₹1.78 lakh crore in April to ₹1.4 lakh crore by December.

These trends mirror deeper structural concerns flagged by the regulator. Sebi data shows nearly 93% of individual retail F&O traders end up with net losses, with the average loss per losing trader at around ₹2 lakh. Yet, participation continues to rise. As per the Economic Survey 2025–26, active demat accounts crossed 23.5 crore by December 2025, and equities and mutual funds now account for over 15% of household financial savings, up sharply from just 2% in FY12, underscoring the widening gap between market participation and outcomes.

Can STT hike fix India’s derivatives problem?

While the policy intent is to discourage speculative trading, Zerodha founder and CEO Nithin Kamath has questioned whether the move will achieve its objective.

In a post on social media platform X, Kamath said that if the goal was to reduce speculation in the F&O segment, “I’m not sure this will do anything.” He pointed out that nearly 95% of derivatives trading volumes are already concentrated in options and cautioned that the higher tax burden on futures could unintentionally push even more activity toward options. “The impact falls mostly on futures, while options are far more speculative than futures,” he said.

Market analysts broadly agree that the immediate impact of the STT hike will be felt most sharply by high-frequency, short-term and high-turnover trading strategies. Even a marginal increase in transaction costs can significantly raise the break-even point in derivatives, where margins are typically thin.

“Even a small increase in transaction costs materially raises the break-even point in derivatives, where margins are already tight,” said Sunny Agrawal, Head of Fundamental Research at SBI Securities. He added that frequent traders, algorithm-driven strategies and option sellers, who rely heavily on rapid trade churn, are likely to see profitability compress quickly.

Will it change retail trading behaviour?

However, views remain divided on how significantly retail trading behaviour may change. Ajit Mishra, SVP–Research at Religare Broking, noted that most retail traders are options buyers operating with relatively smaller trade sizes, where the incremental cost impact per trade may appear limited. “But over time, repeated trading makes the cost meaningful,” he said, warning that sustained profitability pressure could eventually force traders to reassess their strategies.

Some industry experts believe the move is less about restricting speculation outright and more about nudging behavioural correction. Milan Parikh, CEO of Jainam Broking, said higher transaction costs could dampen liquidity in the near term but may improve overall market quality over time. “From a market-structure perspective, this supports healthier participation and better risk discipline,” he said.

Several analysts also see the STT hike as part of a broader policy approach that treats excessive derivatives activity as a potential systemic risk. “The intent is discouragement, not prohibition,” said Palak Shah of PL Capital, comparing the strategy to how regulators address so-called sin sectors.

“With nearly 90% of retail investors reportedly losing money in the F&O segment—often turning it into a bleeding ground that disproportionately benefits HFT and FII traders—the policy intent appears to be discouragement rather than outright bans.”

By steadily increasing entry and exit costs, policymakers aim to cool speculative volumes without causing market disruption, Shah added.

Abhinav Tiwari, Research Analyst at Bonanza, opined that the immediate impact of this change is a higher trading cost for F&O participants. “While the absolute increase per trade looks small, it matters a lot for traders who do frequent and high-volume trades.”

He further added that the STT hike may also lead to a shift in trading behaviour. Since futures have seen a sharper increase in tax rates, some traders may prefer options for directional or hedging strategies. However, multi-leg option strategies will also become costlier, as STT is charged on each leg.

Still, sceptics argue that taxation alone may not address structural issues within derivatives trading. Ambit Capital, for instance, noted that historical evidence suggests such tax changes have had a limited long-term impact on trading activity. The brokerage maintains a cautious outlook, citing broader growth concerns and rising market concentration as additional risks.

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