STT Increased on Futures & Options Trading

STT Increased on Futures & Options Trading

Why in News? 

Recently, the Indian government raised the Securities Transaction Tax (STT) on futures and options trading in the Union Budget 2026, significantly increasing the cost of derivatives transactions to curb speculative activity and manage systemic risk in markets.

What is Securities Transaction Tax (STT)?

• About: Securities Transaction Tax (STT) is a direct tax levied in India on the purchase and sale of securities that are executed on recognized stock exchanges. This tax is charged at the point of transaction and is automatically collected by exchanges or intermediaries at the time of trade. 

• • Objectives: The primary objectives to introduce STT is to generate a steady revenue stream, discourage excessive speculation, and improve the regulatory framework of financial markets.

• Background: STT was introduced on 1 October 2004 in the Union Budget of 2004‑05 to simplify tax compliance and curb evasion of capital gains tax. Before STT, multiple levies on securities trades led to complex procedures and tax avoidance.

• Scope: STT applies only to transactions executed on stock exchanges and does not apply to off‑market transfers, or to commodities and currency trades. The definition of ‘securities’ under STT borrows from the Securities Contracts (Regulation) Act, 1956, and includes equity shares, convertible debentures, derivatives, government securities of equity nature, and units of equity‑oriented mutual funds. It also covers unlisted shares sold under an offer for sale (such as IPOs) that are later listed.

• Calculation: STT is calculated as a percentage of the transaction value and varies with the type of security and nature of transaction. For example, equity delivery trades attract STT at 0.1% on both buy and sell sides, while intraday equity trades are taxed at 0.025% on the sell side. Derivatives like futures and options attract STT on the sell side based on contract value or option premium. The tax burden usually falls on the trader or investor executing the trade. 

Details of the Recent STT Increase on F&O Trades

• STT on Futures Contracts: Under the revised provisions, the STT on the sale of Futures in securities has been increased from 0.02% of the traded price to 0.05% of the traded price. This represents a 150 % rise in the tax burden on futures transactions compared with the previous rate.  

• STT on Options – Premium: For Options contracts, the STT on the sale of option contracts referring to the option premium has been raised from 0.1% to 0.15% of the option premium amount. This increase is a 50 % hike relative to the earlier rate and is payable at the time of selling the option. 

• STT on Exercised Options: Where an option contract is exercised, the STT previously charged was 0.125% of the intrinsic value (difference between underlying price and strike price). Under the new provisions, this has been standardised and increased to 0.15% of the intrinsic value for all exercised options. 

• Effective Date: The revised STT rates will become effective from 1 April 2026 and apply to all F&O transactions in securities entered into on or after that date. These rates apply solely to equity and equity derivatives — the Budget did not propose any change in STT for commodities or currency derivatives.  

Government’s Rationale and Economic Considerations

• Curbing Speculative Trading and Protecting Small Investors: The Government explicitly stated that the STT hike on Futures & Options (F&O) aims to discourage excessive speculative behaviour, especially among retail participants who have engaged in high‑leverage positions with frequent losses. Officials highlighted that derivative turnover in India had grown disproportionately compared to the real economy, indicating speculative, not hedging‑oriented, trading.
• Addressing Systemic Risk in the Derivatives Market: According to government clarifications, the total derivatives transaction volume exceeded more than 500× India’s GDP, which the authorities argue reflects unhealthy market leverage. The STT increase is thus positioned as a tool to temper excessive leverage and reduce the probability of cascading losses that could destabilise broader financial markets.
• Aligning Market Activity with Economic Fundamentals: The rationale behind the STT adjustment also includes a broader economic alignment objective. By increasing trading costs selectively for derivatives, the Government seeks to balance high‑frequency trading activity with sustainable capital market functioning, signalling a shift toward market structures that reward investment rather than short‑term bets.
• Revenue Considerations and Budgetary Targets: Official estimates suggested that actual STT collections were lower than budgeted expectations for FY2025‑26 (about ₹45,000 crore vs. a target of ₹78,000 crore). Higher STT rates are expected to boost government receipts from capital markets, albeit with the risk of lower trading volumes. The move reflects a tax policy calibration balancing revenue objectives with market health.

Impact of Recent STT Hike on F&O trades

• • Market Sentiment: The STT hike on Futures & Options (F&O) announced in the Union Budget 2026 saw a sharp negative reaction across Indian equities, with benchmark indices like Sensex and Nifty experiencing significant volatility and drop on Budget day. The volatility reflected market participants’ concerns about higher trading costs.

• Traders and Investors: With STT on futures increased, transaction costs for derivatives traders have escalated sharply. Higher impact costs directly erode profit margins for frequent traders, arbitrageurs, hedgers and high‑frequency strategies; this is expected to change cost‑benefit calculations for active market participants.

• Reduction in F&O Trading Volumes: Market analysts and brokerage leaders have warned that increased STT is likely to dampen derivatives trading activity by raising friction costs. As a result, liquidity in the F&O segment could reduce, making it costlier to enter and exit positions, particularly for high‑volume and short‑term traders. 

• Foreign Investor: The new STT structure may weigh on short‑term foreign portfolio investor (FPI) flows, especially from funds focused on derivatives and quantitative strategies. Higher transaction costs reduce post‑tax returns for global allocators, potentially tilting capital allocation toward markets perceived to be more cost‑efficient.