The sharp increase in Securities Transaction Tax on derivatives is among the most discussed points of concern after the Budget announcement yesterday. The Futures transactions now attract a 150% higher STT, while options trades face a 50% increase, raising participation costs in India’s most active trading segment. According to Axis Bank Research led by Neelkanth Mishra and Ambit Capital, the effect of this move will show up over time.
Both reports agree that the decision is not driven by the need to raise revenue. Instead, they point to a deliberate attempt to influence how futures and options trading develops, while keeping delivery-based equity participation untouched.
Here are 7 ways higher costs will reshape trade
1. Higher STT is meant to influence behaviour, not raise revenue
Axis Bank Research stated that securities transaction taxes contribute very little to government finances. The report stated, “Taxes on securities transactions yield only 0.2% of GDP.”
The Axis Bank Research note added that the purpose of the move is to restrain excessive short-term trading activity. It said higher costs are being used to limit repeated retail losses without imposing direct restrictions on participation.
Ambit Capital reached a similar conclusion in its Budget analysis. The firm said, “The government increasingly perceives Indian equity markets as mature and structurally resilient.” This confidence, according to Ambit Capital, allows policymakers to tolerate some cooling in trading intensity.
2. Volumes may remain, but trading habits could change
Ambit Capital does not expect an immediate collapse in derivatives volumes. The report noted, “F&O volumes remain highly price-inelastic, as many retail traders continue to pursue high-payoff strategies where incremental costs are relatively immaterial.”
However, the firm cautioned that the impact of higher costs builds over time. Ambit Capital said, “The impact can be more pronounced on proprietary and high-frequency trading desks where thin-margin, high-turnover strategies can become less viable.”
Axis Bank Research data from the previous STT hike supports this pattern. The report stated, “Last year post the STT increase, the govt budgeted Rs 78,000 crore; revised estimates put it at Rs 63,700 crore.”
3. Thin-margin and high-frequency strategies face sustained pressure
Ambit Capital flagged that strategies dependent on speed and scale are most exposed to higher STT. The firm said, “The impact can be more pronounced on proprietary and high-frequency trading desks where thin-margin, high-turnover strategies can become less viable.” Over time, this erodes the economics of such trades, the report added.
The report explained that higher transaction costs reduce the margin available for repeated small gains. As costs rise, fewer trades meet minimum profitability thresholds.
Axis Bank Research reinforced this adjustment pattern. The report said, “Empirical evidence suggests a limited impact on overall market activity.” It added that changes usually occur in cost-sensitive strategies rather than across the entire market.
4. Execution costs may rise even if liquidity stays
Ambit Capital cautioned that the long-term effect may be visible in trading conditions. The report said, “Wider bid-ask spreads may emerge as certain high-frequency strategies scale down.” This could raise execution costs for participants.
The firm clarified that this does not point to a loss of liquidity. Instead, it reflects reduced activity in ultra-fast trading strategies that rely on frequent turnover.
Axis Bank Research echoed a measured assessment. The note stated, “Empirical evidence suggests a limited impact on overall market activity.” According to the report, market depth generally remains intact.
5. Delivery-based equity participation is unlikely to be affected
Both reports stressed that the STT hike is restricted to derivatives trading. Axis Bank Research noted, “STT rates on cash equities remain unchanged at 0.10% for delivery and 0.025% for intraday trades.” This leaves delivery-based investing untouched, as per both reports.
The Axis Bank Research note explained that unchanged cash-equity taxes protect households investing for longer periods.
Ambit Capital reinforced this distinction. The firm said, “The policy focus is on curbing speculative activity rather than long-term investment.” Delivery-based participation, according to the report, remains a stabilising factor.
6. The STT hike fits into a restrained fiscal approach
Ambit Capital placed the STT decision within the FY27 Budget stance. The report stated, “Both revex and capex growth don’t display meaningful acceleration, and revenue growth slowdown amid elevated borrowing will keep yields elevated over the near term.”
According to Ambit Capital, selective actions are now preferred over broad support. The STT hike addresses trading intensity without raising spending or cutting taxes elsewhere.
Axis Bank Research reinforced this discipline. The report said, “Government sticking to the debt-to-GDP anchor helpful for bond markets.”
7. Low-conviction trades may become harder to sustain
Axis Bank Research described the STT hike as corrective. The report said, “Higher STT is intended to curb speculation and protect retail investors.” This raises the cost of repeated low-quality trades.
The Axis Bank Research note explained that higher costs discourage frequent, low-margin activity. Over time, this reduces tolerance for trades with weak risk-reward profiles, it explained.
Ambit Capital added that market conditions remain challenging. The firm said, “An acceleration in earnings growth is unlikely.” This increases sensitivity to higher trading costs, it furtheradded.
Conclusion
Neelkanth Mishra’s Axis Bank Research note and Ambit Capital’s analysis both treat the STT hike as a long-term cost reset rather than a one-off Budget change. Trading is expected to continue, but frequent activity now comes with a higher and lasting cost.