STT and F&O explained: Why has FM Nirmala Sitharaman’s proposed hike on Securities Transaction Tax in her Budget speech left traders worried? All FAQs answered

Union Finance Minister Nirmala Sitharaman on Sunday proposed an increase in the Securities Transaction Tax (STT) on derivatives during her budget speech. In her Budget speech for 2026-27, Sitharaman said the STT on futures contracts would be raised to 0.05 per cent from 0.02 per cent following which stock markets spooked. Nifty50 ended the special trading session at 24,825.45, down 593 points or 2.33%. BSE Sensex ended at 80,722.94, down 1,843 points or 2.23%.

"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. The move is aimed at curbing excessive speculation in the futures and options (F&O) segment. Additionally, the government will tax buyback proceeds for all types of shareholders as capital gains, Sitharaman said.

What is STT and F&O trading?

Securities Transaction Tax (STT) is charged on stock market trades and applies to every transaction, regardless of whether it results in a profit or a loss. It covers equities, equity mutual funds, as well as futures and options.


STT was introduced on October 1, 2004, and it was aimed at simplifying tax collection, curbing tax evasion in equity and derivatives trading, and replacing earlier exemptions on long-term capital gains. Even after the reintroduction of LTCG tax in 2018, STT has continued to remain in force.

On the other hand, F&O trading (Futures and Options) deals with contracts rather than actual shares. Futures are agreements to buy or sell an asset at a predetermined price at a later date, while options provide the right—but not the obligation—to do so within a specified period. While F&O can offer the potential for higher gains, it also carries greater risk, as it involves speculating on a stock’s future price movements.

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What has changed for STT in the new budget?

The futures STT has increased from 0.02 per cent to 0.05 per cent (a 150 per cent hike)

Options STT (premium): Increased from 0.10 per cent to 0.15 per cent (50 per cent hike)

Options STT (exercise): Increased from 0.125 per cent to 0.15 per cent (20 per cent hike)

This means trading F&O is now more expensive, especially for frequent traders.

Why are the traders concerned?

The traders are concerned as trading and certain corporate cash distribution routes are set to become costlier. The STT hike directly raises trading costs, impacting high-frequency traders, speculative F&O participants, and retail investors the most.

For instance, on a futures contract worth ₹1 lakh, the tax earlier was ₹20; now it is ₹50. While the difference may seem small for a single trade, for those who execute multiple trades daily, the added cost can quickly accumulate and eat into profits.

Investors reacted negatively to a hike in Securities Transaction Tax (STT) on futures and options (F&O) trades announced by FM Sitharaman. Narendra Solanki, Head Fundamental Research - Investment Services,Anand Rathi Share and Stock Brokers Limited is of the view that stock markets are seeing a knee-jerk reaction. “Markets witnessed a knee-jerk reaction following the unexpected hike in STT on Futures and Options, as hopes of a reduction in capital gains tax had already been priced in,” he said.

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Stock market crash

The STT announcement triggered aggressive selling, especially in stocks linked to trading, broking, and overall market activity, as participants reassessed the higher cost of operating in the derivatives segment. Brokerage and exchange-related counters led the decline, with shares of BSE Ltd, Groww parent Billionbrains Garage Ventures, and Angel One plunging by up to 13.5%. BSE fell to an intraday low of ₹2,517.30, while Angel One dropped to ₹2,284.70.

Market participants observed that the announcement came at a time when equities were already facing volatility and persistent selling. The sudden rise in transaction costs heightened concerns, sparking a widespread sell-off across sectors.

Shripal Shah, Managing Director and CEO of Kotak Securities, told the Times of India the steep increase in STT could dampen derivatives activity. He noted that the sharp hike in futures and options taxes, following last year’s increase, is likely to raise impact costs for traders, hedgers, and arbitrageurs, potentially cooling trading activity and reducing volumes.

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Why has the government increased STT?

Curb speculation: Most retail F&O traders incur losses — nine out of ten, according to SEBI. A higher STT makes frequent short-term trades less attractive.

Boost tax revenue: Enables greater tax collection from the fast-growing derivatives segment.

Refocus on the cash market: Nudges retail investors to prioritise equities over higher-risk derivatives trading.