STT on F&O: Will FPI outflows surge? Implication of Budget 2026 announcements
A higher STT further reduces post-tax returns, making India relatively less competitive. But for long-only, fundamentally driven FPIs, the STT hike is unlikely to be a deal-breaker.
- Feb 1, 2026,
- Updated Feb 1, 2026 2:35 PM IST
Union Budget 2026: Benchmark stock indices fell sharply in Sunday's trade, as investors digested announcements such as raising of Securities Transaction Tax (STT) on options premium from 0.1 per cent to 0.15 per cent and increasing of STT on futures to 0.05 per cent in the Budget 2026, signaling the government’s intent to moderate excessive speculative activity in the derivatives market.
Analysts said the proposal to raise STT on futures to 0.05 per cent is structurally negative for the capital market ecosystem, particularly F&O-driven businesses. Higher transaction costs are likely to reduce trading volumes, dampen short-term momentum, and lower profitability for active market participants, analysts said.
"FII participation in derivatives may also moderate as post-tax trading efficiency declines, impacting overall liquidity. This can create a cascading effect on revenue streams of broking companies, exchanges, AMCs, and depositories, which are closely linked to market turnover. With derivatives volumes already shrinking in recent months, the hike may further pressure near-term earnings visibility. While fiscally supportive, the measure poses headwinds for capital-market-linked stocks," said Raj Gaikar, Research Analyst at SAMCO Securities.
Aakash Shah, Technical Research Analyst at Choice Equity Broking said recent data already shows that FPIs have been cautious — with equity outflows of over Rs 41,000 crore in January 2026 alone, reflecting global risk-off sentiment, elevated US bond yields, and currency pressures.
"In this context, a higher STT further reduces post-tax returns, making India relatively less competitive for short-term and derivative-oriented foreign flows. However, for long-only, fundamentally driven FPIs, the STT hike is unlikely to be a deal-breaker. Their investment decisions are more influenced by earnings visibility, currency stability, and policy predictability. That said, at the margin, higher transaction costs could tilt some global allocators towards other Asian markets, especially at a time when India is already facing pressure from AI-led capital shifts to the US, Taiwan and Korea."
Shah said STT hike may help boost tax collections but it risks dampening trading volumes and could slow tactical FPI participation. To meaningfully revive sustained FPI inflows, investors will now be looking more closely at macro stability, rupee movement, and consistency in tax policy rather than just growth optics, Shah said.
Shripal Shah, MD & CEO at Kotak Securities said 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.”
The moves seemed to address excessive speculative activity in the derivatives market, said Rajarshi Dasgupta, Executive Director for Tax, AQUILAW said.
“While the impact on long-term investors is minimal, higher transaction costs could reduce high-frequency and short-term trading volumes. The challenge will be to strike a balance between curbing speculative excesses and ensuring that market liquidity and price discovery are not adversely affected. The government will need to take timely efforts to minimise the impact on market liquidity and price discovery which is expected to come in due time.”
The Budget also made announcements regarding equity investments by individual persons resident outside India via Portfolio Investment Scheme.
"The individual limit is set to be increased from 5 per cent to 10 per cent, while the combined cap for all such investors is proposed to rise from 10 per cent to 24 per cent. This change would allow serious foreign individual investors to take more meaningful stakes in Indian companies, potentially improving price discovery, deepening shareholding, and supporting long-term capital formation,” he said.
Sharebuyback proceeds as capital gains
Rajarshi Dasgupta, Executive Director atTax, AQUILAW said classifying share buyback proceeds as capital gains for all shareholders is a welcome step toward simplifying the tax framework.
"By aligning buyback taxation with capital gains rules, the move reduces inconsistencies, brings more transparency, and provides companies and investors with greater clarity when planning buybacks. Clearer guidelines like this can improve market efficiency and boost investor confidence as India’s capital markets continue to grow,” Dasgupta said.
PROI investments in domestic equities
The ownership limits for persons resident outside India has been raised from 5 per cent to 10 per cent of a company’s paid-up capital, while the aggregate limit for such investors has been increased from 10 per cent to 24 per cent. This additional headroom, particularly in large- and mid-cap stocks where limits were earlier restrictive, may attract more stable and patient capita, said analysts.
"However, the overall impact will depend on operational ease, including account opening processes, KYC requirements and the structural constraints of PIS-linked demat accounts. As with most market reforms, effective implementation will be key to sustaining investor interest,” Partha Sengupta, Joint MD & CEO at Systematix Private Wealth.
The amendment to open up the Indian capital markets for Persons Resident Outside India (PROIs) has been proposed in Budget 2026.
Himanshu Srivastava, Principal, Manager Research, Morningstar Investment Research India said allowing individuals resident outside India to invest domestically appears to be a positive reform. It could prove to be a step toward widening India’s capital market access, improve liquidity and deepen market participation .
"However, wide-ranging implications of this announcement can be assessed only after more details are out. Until operational details emerge, investors should view this as a directional signal rather than a near-term catalyst," Srivastava said.
Manoj Purohit, Partner, Financial Services Tax, Tax & Regulatory Advisory at BDO India said Indian non-residents understand the sentiment of the Indian capital markets and are keen to invest in them. This welcoming measure will not only increase inflows but also help stabilise the currency and capital markets, he said.
Union Budget 2026: Benchmark stock indices fell sharply in Sunday's trade, as investors digested announcements such as raising of Securities Transaction Tax (STT) on options premium from 0.1 per cent to 0.15 per cent and increasing of STT on futures to 0.05 per cent in the Budget 2026, signaling the government’s intent to moderate excessive speculative activity in the derivatives market.
Analysts said the proposal to raise STT on futures to 0.05 per cent is structurally negative for the capital market ecosystem, particularly F&O-driven businesses. Higher transaction costs are likely to reduce trading volumes, dampen short-term momentum, and lower profitability for active market participants, analysts said.
"FII participation in derivatives may also moderate as post-tax trading efficiency declines, impacting overall liquidity. This can create a cascading effect on revenue streams of broking companies, exchanges, AMCs, and depositories, which are closely linked to market turnover. With derivatives volumes already shrinking in recent months, the hike may further pressure near-term earnings visibility. While fiscally supportive, the measure poses headwinds for capital-market-linked stocks," said Raj Gaikar, Research Analyst at SAMCO Securities.
Aakash Shah, Technical Research Analyst at Choice Equity Broking said recent data already shows that FPIs have been cautious — with equity outflows of over Rs 41,000 crore in January 2026 alone, reflecting global risk-off sentiment, elevated US bond yields, and currency pressures.
"In this context, a higher STT further reduces post-tax returns, making India relatively less competitive for short-term and derivative-oriented foreign flows. However, for long-only, fundamentally driven FPIs, the STT hike is unlikely to be a deal-breaker. Their investment decisions are more influenced by earnings visibility, currency stability, and policy predictability. That said, at the margin, higher transaction costs could tilt some global allocators towards other Asian markets, especially at a time when India is already facing pressure from AI-led capital shifts to the US, Taiwan and Korea."
Shah said STT hike may help boost tax collections but it risks dampening trading volumes and could slow tactical FPI participation. To meaningfully revive sustained FPI inflows, investors will now be looking more closely at macro stability, rupee movement, and consistency in tax policy rather than just growth optics, Shah said.
Shripal Shah, MD & CEO at Kotak Securities said 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.”
The moves seemed to address excessive speculative activity in the derivatives market, said Rajarshi Dasgupta, Executive Director for Tax, AQUILAW said.
“While the impact on long-term investors is minimal, higher transaction costs could reduce high-frequency and short-term trading volumes. The challenge will be to strike a balance between curbing speculative excesses and ensuring that market liquidity and price discovery are not adversely affected. The government will need to take timely efforts to minimise the impact on market liquidity and price discovery which is expected to come in due time.”
The Budget also made announcements regarding equity investments by individual persons resident outside India via Portfolio Investment Scheme.
"The individual limit is set to be increased from 5 per cent to 10 per cent, while the combined cap for all such investors is proposed to rise from 10 per cent to 24 per cent. This change would allow serious foreign individual investors to take more meaningful stakes in Indian companies, potentially improving price discovery, deepening shareholding, and supporting long-term capital formation,” he said.
Sharebuyback proceeds as capital gains
Rajarshi Dasgupta, Executive Director atTax, AQUILAW said classifying share buyback proceeds as capital gains for all shareholders is a welcome step toward simplifying the tax framework.
"By aligning buyback taxation with capital gains rules, the move reduces inconsistencies, brings more transparency, and provides companies and investors with greater clarity when planning buybacks. Clearer guidelines like this can improve market efficiency and boost investor confidence as India’s capital markets continue to grow,” Dasgupta said.
PROI investments in domestic equities
The ownership limits for persons resident outside India has been raised from 5 per cent to 10 per cent of a company’s paid-up capital, while the aggregate limit for such investors has been increased from 10 per cent to 24 per cent. This additional headroom, particularly in large- and mid-cap stocks where limits were earlier restrictive, may attract more stable and patient capita, said analysts.
"However, the overall impact will depend on operational ease, including account opening processes, KYC requirements and the structural constraints of PIS-linked demat accounts. As with most market reforms, effective implementation will be key to sustaining investor interest,” Partha Sengupta, Joint MD & CEO at Systematix Private Wealth.
The amendment to open up the Indian capital markets for Persons Resident Outside India (PROIs) has been proposed in Budget 2026.
Himanshu Srivastava, Principal, Manager Research, Morningstar Investment Research India said allowing individuals resident outside India to invest domestically appears to be a positive reform. It could prove to be a step toward widening India’s capital market access, improve liquidity and deepen market participation .
"However, wide-ranging implications of this announcement can be assessed only after more details are out. Until operational details emerge, investors should view this as a directional signal rather than a near-term catalyst," Srivastava said.
Manoj Purohit, Partner, Financial Services Tax, Tax & Regulatory Advisory at BDO India said Indian non-residents understand the sentiment of the Indian capital markets and are keen to invest in them. This welcoming measure will not only increase inflows but also help stabilise the currency and capital markets, he said.