STT hike explained: How costlier derivatives could change market liquidity and investor strategy

Indian equity markets witnessed sharp selling pressure on Sunday after the Union Budget 2026–27 delivered a surprise hike in the Securities Transaction Tax (STT) on equity derivatives, significantly raising trading costs and denting investor sentiment, particularly in the futures and options (F&O) segment.

The sharp revision triggered a knee-jerk selloff during the special Budget session on February 1, wiping out nearly ₹10 lakh crore in investor wealth, with the Sensex and Nifty sliding close to 2%. Brokerage firms and exchanges bore the brunt of the decline, with stocks such as Angel One and BSE Ltd plunging over 13% amid concerns over a potential hit to transaction-linked revenues.

Under the Budget proposals, STT on equity futures has been raised to 0.05% from 0.02%, while STT on options has been increased to 0.15% from 0.10% on option premia and from 0.125% on exercised options. The revised rates will come into effect from April 1.

Will it alter the cost economics of derivative trading?

Market participants said the move materially alters the cost structure of derivative trading. A round-trip Nifty futures trade now requires roughly 20–25 index points merely to break even, making high-frequency trading and low-margin systematic strategies increasingly unviable.

Ponmudi R, CEO of Enrich Money, said markets may remain under pressure in the near term as investors reassess positioning. “The sharp negative reaction to the Budget was triggered by the surprise hike in STT on derivatives, which significantly raises trading costs. While DII buying could offer some support, near-term sentiment remains cautious to mildly bearish as F&O-heavy stocks and brokerage counters come under pressure,” he said, adding that volatility and correction risks may persist until stability returns.

VK Vijayakumar, Chief Investment Strategist at Geojit Investments, termed the selloff a knee-jerk reaction rather than a fundamental reassessment of India’s growth story. “This was not a revenue-raising measure, but a decision aimed at discouraging retail participation in complex F&O trading, where 92% of traders lose money. While the intent is in the interest of retail investors, the move impacted market sentiment, which was already fragile due to the absence of any relief on long-term capital gains tax,” he said.

Analysts cautioned that a sustained decline in derivative volumes could weigh on overall market liquidity, with participation potentially falling by 20–30% over time.

Emkay Global said that while capital gains taxes were largely left untouched, the STT hike on derivatives was far sharper than anticipated. “This could hurt volumes and market liquidity. Exchanges and broking stocks are the primary losers, but a sustained lack of depth in the market could eventually have implications for overseas institutional flows as well,” the brokerage said.

At SBICAP Securities, Managing Director and CEO Bhuvaneshwari A. said the announcement appeared to have unsettled investors, even though the broader intent was to curb excessive speculation. “The calibrated increase in STT on futures and options seeks to encourage healthier cash-market participation. With GDP growth projected at a robust 10%, the Budget continues to reinforce India’s long-term investment appeal,” she said.

However, some market participants believe the impact on long-term behaviour may be limited. Amit Majumdar, Group Chief Strategy Officer at Angel One Ltd, said marginal increases in transaction costs are unlikely to alter structural trends. “India’s retail participation and broader financialisation are still at a relatively early stage. Marginal changes in transaction costs do not change the long-term behaviour of capital market participants,” he said.

Anand James, Chief Market Strategist at Geojit Investments, said the STT hike could be equity-positive over time as options trading becomes more expensive. “At a portfolio level, the hit to derivatives could lead to rebalancing and drag equities in the near term. But it is difficult to argue that the hike alone will deter speculative interest, particularly in options,” he said.

By keeping delivery-based equity STT unchanged, the government has signalled its intent to steer investors away from short-term speculative trading toward long-term capital formation. Market experts, however, caution that while the long-term growth narrative remains intact, the abrupt rise in transaction costs could keep equity markets volatile in the near term, especially as participants adjust to the new regime ahead of April 1.

(DISCLAIMER: The views and opinions expressed by investment experts on fortuneindia.com are either their own or of their organisations, but not necessarily that of fortuneindia.com and its editorial team. Readers are advised to consult certified experts before taking investment decisions.)