STT hike in F&O trade to curb speculative trade, protect small investors

Finance Minister Nirmala Sitharaman on Sunday announced an increase in the Securities Transaction Tax STT on Futures and Options trade with a view to discouraging small investors from speculative trading in derivatives, which led to a sharp decline in the stock market.

Finance Minister Nirmala Sitharaman on Sunday announced an increase in the Securities Transaction Tax (STT) on Futures and Options trade with a view to discouraging small investors from speculative trading in derivatives, which led to a sharp decline in the stock market. The government expects to collect Rs 73,700 crore through STT in FY27. It is likely to mop up Rs 63,670 crore in the current fiscal, lower than the previous estimate of Rs 78,000 crore. In her Budget speech for 2026-27, Sitharaman said the STT on futures contracts will be raised to 0.05 per cent from 0.02 per cent. ''STT on options premium and exercise of options are both proposed to be raised to 0.15 per cent from the present rate of 0.1 per cent and 0.125 per cent, respectively,'' she said. Following the announcement, benchmark stock indices Sensex and Nifty dived sharply by nearly 2 per cent. Addressing a post-budget conference, Sitharaman said the government is not against derivative trade, but wants small investors, who are facing huge losses, to stay away from the speculative F&O market. ''This nominal increase is purely aimed at speculation, only to deter them, to discourage them. We are not against it (F&O trade), but small investors are facing losses, so how can we be quiet, so it (STT hike on F&O) is to deter such investments,'' Sitharaman said. The hike in STT is aimed squarely at high-volume derivative trading, rather than the cash equity market, and is expected to increase transaction costs for active and short-term trading strategies. Market experts believe that the move could help discourage excessive speculative activity and promote a more balanced market structure. However, some caution that it may weigh on foreign portfolio investor (FPI) participation in the near term. Ashishkumar Chauhan, MD & CEO, NSE, said that the budget ''deepens financial markets through calibrated measures, higher STT on derivatives to curb excess speculation''. ''The recalibration of STT is designed to encourage investor focus on long-term equity participation, thereby fostering healthier liquidity and more sustainable market dynamics,'' Sundararaman Ramamurthy, MD and CEO at BSE, said. Aakash Shah, Technical Research Analyst at Choice Equity Broking, said the increase in STT, particularly in futures and options, is likely to act as a marginal negative for FPI flows, especially for high-frequency and derivative-focused global funds. According to studies by Sebi, over 90 per cent of retail investors' trades in the F&O segment lead to losses, and the capital markets regulator has also taken steps to reduce volumes in the past. Market regulator Sebi, in the past, also cautioned small and retail investors against trading in the F&O segment, underscoring the need for responsible investing. Addressing questions on the intention behind the STT hike, Revenue Secretary Arvind Shrivastava said it has been done to discourage speculative tendencies and handle systemic risk in the derivatives market. ''The government's intention is to discourage speculative tendencies, and the increase in rate is essentially in that direction. So, it is meant to essentially handle the systemic risk in derivative markets,'' he added. Shrivastava said even after this increase, the rates of STT will remain modest compared to the volume of the transactions that are happening. Kotak Securities Managing Director and Chief Executive Shripal Shah said the steep increase in STT is likely to raise impact costs for traders, hedgers, and arbitrageurs. ''The intent appears to be volume moderation rather than revenue maximisation, as any potential revenue gain could be offset by lower derivative volumes,'' he added. ''Higher transaction costs are likely to reduce trading volumes, dampen short-term momentum, and lower profitability for active market participants,'' SAMCO Securities, a domestic brokerage, said in a note. This will lead to a moderation in the foreign institutional investors in the derivatives market as post-tax trading efficiency declines, it said, warning that this can create a ''cascading effect'' on revenue streams of broking companies, exchanges, asset management companies, and depositories. A Balasubramanian, Managing Director and CEO, Aditya Birla Sun Life AMC, said the increase in STT on derivatives may impact trading, but it should be looked at as an encouragement to gradually shift towards the cash market and long-term investing.

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