Budget 2026: FM Sitharaman raises STT on F&O Trades, signals tighter market oversight

Finance Minister Nirmala Sitharaman on Sunday announced a hike in the Securities Transaction Tax (STT) on derivatives trading as part of the Union Budget 2026, signalling the government’s intent to rein in excessive speculative activity in the rapidly expanding futures and options (F&O) market. Under the proposal, STT on futures contracts has been raised to 0.05% from 0.02%, while the levy on options premium has been increased to 0.15% from 0.1%.

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The move comes amid heightened regulatory and policy scrutiny of derivatives trading, especially as retail participation and leverage in the F&O segment have surged over the past few years. While the increase is modest in absolute terms, it raises transaction costs for frequent traders and is expected to have a greater impact on high-frequency and short-term strategies rather than on long-term investors.

Rajarshi Dasgupta, Executive Director – Tax at AQUILAW, said the decision reflects the government’s effort to moderate speculative excesses without disrupting market functioning. “The increase in STT on options premium and futures signals intent to curb excessive speculation. While long-term investors will see minimal impact, higher transaction costs could reduce short-term and high-frequency trading volumes. The challenge will be to strike the right balance so that market liquidity and price discovery are not adversely affected,” he said, adding that timely policy adjustments would be crucial if trading volumes are hit.

Market participants also see the STT hike as part of a broader signal on regulatory oversight. Divam Sharma, Co-founder and Fund Manager at Green Portfolio PMS, noted that the increased focus on derivatives reflects growing concern around market stability and retail investor exposure. “The STT hike is relatively modest and is unlikely to materially alter brokerage business models or act as a lasting deterrent for active F&O participants. Liquidity in the derivatives market remains strong, and structural participation trends are intact,” he said.

However, Sharma added that the real impact will become clearer over time. “The more important variable will be the incremental tax revenue generated from derivatives volumes and whether this translates into more disciplined trading behaviour. At this stage, the move appears aimed at closer monitoring rather than abrupt intervention,” he said. Over the long term, such calibrated measures could help balance market depth with investor protection.

STT was introduced in India on October 1, 2004, as a levy on securities transactions carried out on recognised stock exchanges. It applies to equities, equity mutual funds, and derivatives, and is collected at the time of the transaction regardless of whether the trade results in a profit or loss. While the long-term capital gains tax on equities was reintroduced in 2018, STT has remained in place, making it a recurring point of concern for traders as transaction costs rise.

Alongside derivatives taxation, Sitharaman also announced a change in the taxation of share buybacks. Amit Gupta, Partner at Saraf and Partners, said buyback proceeds will once again be treated as capital gains rather than dividends. “The buyback taxation regime had been revamped in earlier budgets to prevent promoter profit extraction and abuse. Reverting to capital gains treatment is a welcome change and should address long-standing taxpayer concerns around buyback route taxation,” he said.