One of the major announcements in the Budget today was the hike in STT, or Securities Transaction Tax. Finance Minister Nirmala Sitharaman proposed increasing the STT on futures and options (F&O) to 0.05% from 0.02%. The finance minister said the STT on F&O has been raised to discourage speculative trading. The announcement spooked the markets, prompting investors to turn extremely cautious.
What’s the rationale behind the sharp hike in STT?
Not only was the STT hike a surprise, but the magnitude of the increase was significant as well. Market veteran Ajay Bagga highlighted that “a 150% hike in STT on futures and a 50% hike in STT on options is a surprise. Already, F&O volumes are down in FY26, and against the target of Rs 75,000 crore in collections, they stand at Rs 48,000 crore as of mid-January. Markets have not liked this increase in tax. This was an opportunity to reduce STT, and the hike has come as a big surprise.”
Promod Batra, Partner, Deloitte India, pointed out that the measure was perhaps undertaken “to discourage speculation in options and futures in securities. The rate of STT is sought to be increased from 0.1% to 0.15% of the option premium, and where the option is exercised, from 0.125% to 0.15%. For futures in securities, STT on sale has been increased from 0.02% to 0.05%.”
How will the STT hike impact trading volumes?
Shripal Shah, MD and CEO of Kotak Securities, said that “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,” Shah added.
The increased scrutiny on F&O trading stems from multiple instances of retail investors incurring losses in equity index derivatives. A study conducted by SEBI earlier revealed that around 93% of individual traders in the equity futures and options segment continue to incur losses. More concerning is that despite consecutive years of losses, over 75% of loss-making traders continued trading in F&O.
What is STT?
To recap, STT, or Securities Transaction Tax, is a tax levied on securities transactions, whether buying or selling. The tax is charged based on the transaction value at the time the trade is executed.