What Is Securities Transaction Tax? Who Will Be Affected After Budget 2026 STT Hike & Why Markets Fell?

The Union Budget 2026-27, presented by Finance Minister Nirmala Sitharaman on Sunday, February 1, triggered a sharp reaction on Dalal Street, with markets slipping sharply after the government proposed a sharp hike in Securities Transaction Tax (STT) on futures and options (F&O).

The Nifty extended losses by over 593 points, while the Sensex fell even sharper by 1843 points, as traders reacted negatively to the higher transaction costs. Market participants were quick to point out that STT is the key reason markets are unhappy with Budget 2026.

What Is Securities Transaction Tax (STT)?

Securities Transaction Tax (STT) is a direct tax levied by the Government of India on securities transactions carried out on recognised stock exchanges such as National Stock Exchange (NSE) and Bombay Stock Exchange (BSE).
Whenever you buy or sell certain securities on the stock market, a small tax is charged on the transaction value. Importantly, STT is charged on transactions, not on profits meaning traders pay it even if they incur losses. STT applies only when trades are executed on NSE or BSE.

Where Is STT Levied?

STT is applicable on Equity shares (buy and sell), Futures and options (F&O), Equity-oriented mutual funds (on redemption) and Equity exchange-traded funds (ETFs)

STT Hike in Budget 2026: What Has Changed?

In Budget 2026, the government announced a sharp increase in STT rates, especially impacting derivatives traders STT on futures increased to 0.05% from 0.02% a 150% hike and STT on options premium raised to 0.15% from 0.10% , a 50% hike
This is one of the steepest increases in STT in recent years, significantly raising trading costs for active market participants.

"The increase in Securities Transaction Tax (STT), especially in futures and options, is likely to act as a marginal negative for foreign portfolio investor (FPI) flows in the near term, particularly for high-frequency and derivative-focused global funds. As per post-Budget updates, STT on futures has been raised from 0.02% to 0.05%, and on options premium from 0.10% to 0.15%, which meaningfully increases transaction costs for active strategies. said Aakash Shah, Technical Research Analyst at Choice Equity Broking

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."

Why Are Markets Reacting Negatively to the STT Hike?

Markets dislike the STT hike because it directly eats into trading profitability, especially in derivatives where margins are thin.
"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." Shripal Shah, MD & CEO, Kotak Securities.