A few months ago, Finance Minister Nirmala Sitharaman was refreshingly candid in acknowledging that retail investors are consistently losing money in the derivatives market. Yet she was equally clear that it was neither her intention nor that of the government to restrict their participation or redirect their savings elsewhere.
“The state’s role was limited to creating awareness about risks,” she said. Against this backdrop, the Union Budget’s decision to sharply raise the securities transaction tax (STT)—by 150% on futures and 50% on options—comes as more than a mild surprise, especially given its timing.
Indian equity markets under pressure
The move comes when Indian equity markets are already under pressure, with foreign portfolio investors pulling out close to Rs 2 lakh crore since 2025. In that context, imposing a tax that is likely to yield barely Rs 10,000 crore—or less if trading volumes shrink—sits awkwardly with the broader objective of shoring up confidence and stemming capital flight.
Supporters of the move argue that it will curb high-frequency traders who profit disproportionately at the expense of retail investors, prompting some to describe it as a “sin tax”. But there are more effective ways to temper speculative excess without damaging market sentiment.
Crucially, the STT hike makes no distinction between derivatives used for speculation and those deployed for legitimate hedging, penalising both indiscriminately. There is, in fact, a stronger case for rethinking the very architecture of market taxation. When STT was introduced in 2004, it was meant to replace capital gains tax and curb evasion.
Today, investors pay both, resulting in double taxation on the same transaction. That distortion has only grown more pronounced with successive rate hikes.
Broader regulatory philosophy
More worrying is the broader regulatory philosophy that appears to be taking hold. Increasingly, the state has assumed the role of a guardian when it comes to risky financial behaviour: tax it heavily, or ban it outright. Cryptocurrencies, online gaming, and now futures and options are cases in point.
A committee was set up some time ago to examine cryptocurrencies, but clarity remains elusive. Investors only know that income from such assets is classified as speculative and taxed punitively. Elsewhere, notably in the US, regulators have opted for oversight rather than outright deterrence, with significant activity migrating to stablecoins and other regulated crypto instruments.
Experience suggests that heavy taxation does not extinguish demand. Despite punitive levies, participation in gaming and crypto markets has continued. There is a real risk that derivatives trading, too, could shift towards unregulated or offshore venues.
This risk is underscored by market data. Despite repeated curbs by the Securities and Exchange Board of India, combined daily average notional turnover in futures and options on the NSE and BSE hit a record Rs 592.34 lakh crore in January, surpassing the previous high of Rs 537.26 lakh crore in September 2024.
As Zerodha Founder Nithin Kamath noted on X, if curbing speculation is indeed the objective, product suitability norms—determining who can trade and under what conditions—would be far more effective than what he called “death by a thousand STT hikes”. Yet, the government is unwilling to go down the product-suitability route.
That reluctance leaves the market in an awkward position: burdened with higher costs, unresolved risks, and a policy approach that neither fully protects retail investors nor strengthens market confidence. The market should not be asked to keep paying the price for a problem that taxation alone cannot fix.