OPINION | Budget 2026–27, STT hike and the F&O market reality

The market’s sharp reaction to the STT proposal reflects discomfort with higher transaction costs

The Union Budget 2026–27 appears growth-oriented, with a clear focus on improving employment and employability. However, the equity markets did not respond kindly. On Budget day, the Bombay Stock Exchange (BSE) Sensex fell by 1,547 points, while the National Stock Exchange (NSE) Nifty declined by 495 points.

Interestingly, while the Finance Minister (FM) was delivering her Budget Speech—which concluded at 12:30 PM—the markets remained relatively stable until about 12:10 PM. The sharp fall began immediately after the FM read out Paragraph 141 of the Budget. Following this announcement, the Sensex plunged by nearly 2,828 points intraday, before recovering partially to close with a loss of 1,547 points at 3:30 PM.

Paragraph 141 stated: “I propose to raise the Securities Transaction Tax (STT) on futures to 0.05 percent from the present 0.02 percent. STT on options premium and exercise of options are both proposed to be raised to 0.15 percent from the present rate of 0.1 percent and 0.125 percent respectively.”

While the immediate reaction was sharp, it is equally important to note that the market recovered by nearly 943 points the very next day. This raises an important question: Was the reaction justified, and does the proposal have merit?

The FM’s Rationale Behind STT Increase

To understand this proposal, one must first examine the Finance Minister’s perspective. Responding to media queries, the FM clarified that the enhanced STT applies only to Futures and Options (F&O)transactions and not to all stock market trades.

She further explained that the government had received several representations from parents concerned about their children losing money in derivatives trading. Emphasizing that F&O is a highly speculative segment, the FM stated that the increase in STT was a deliberate policy measure to discourage excessive speculation, particularly among retail investors.

This concern is not unfounded. Data consistently shows that retail participation in derivatives—especially options—has surged in recent years, with a majority of participants suffering losses.

Understanding F&O: Who Gains and Who Loses

Futures and Options are derivative instruments whose value is derived from an underlying asset such as a stock or index. They allow traders to speculate on future price movements without owning the asset itself.

A futures contract is an agreement to buy or sell an asset at a predetermined price on a future date. Gains or losses depend entirely on how prices move relative to that agreed price.

An option contract, on the other hand, gives the buyer the right—but not the obligation—to buy (call option) or sell (put option) an asset at a specified price. The buyer pays a premium, and while losses are limited to this premium, repeated losses can quickly erode capital.

In practice, most retail investors are option buyers, while large institutions and high-net-worth individuals are option sellers. Since an estimated 80–90% of options expire worthless, the odds are structurally stacked against small traders.

The Jane Street Episode and Regulatory Concerns

Concerns around retail losses gained further traction following revelations involving Jane Street, a US-based algorithmic trading firm. The Securities and Exchange Board of India (SEBI) accused the firm of making illegal profits of nearly ₹4,850 crores. A subsequent study revealed that Jane Street and its associates earned approximately ₹36,700 crores over just 26 months between January 2023 and March 2025.

This episode shook India’s financial markets and sparked debate over whether small investors are being systematically exploited by sophisticated global players using advanced algorithms and superior technology. The Finance Minister cited this study to reinforce her view that excessive speculation in derivatives is harming retail investors.

Is Raising STT Enough?

While the intent behind increasing STT is commendable, the measure by itself may not be sufficient. A marginal increase in transaction cost may not deter speculative behavior, especially among retail traders chasing quick gains.

One extreme but effective solution would be to disallow F&O trading altogether, as derivatives are not the core function of stock exchanges. However, such a move would face strong resistance.

A more balanced alternative would be to restrict derivative contracts to monthly expiries instead of weekly expiries. Weekly options, introduced over the past decade, have dramatically changed trading behavior. Lower premiums and frequent expiries attract small investors with limited capital, encouraging gambling-style trading. Weekly expiries multiply opportunities to speculate—and to lose.

Earlier, when only monthly expiries existed, traders took positions with a longer-term view. Weekly expiries have increased volatility, intensified expiry-day manipulation, and disproportionately benefited large option sellers at the cost of retail buyers.

Additional Measures to Protect Retail Investors

Beyond STT hikes, regulators can adopt several complementary measures:

* Restrict or limit weekly expiries, especially to fewer indices

* Enhance investor education on derivative risks

* Increase margin requirements for retail traders to curb over-leverage

* Mandate greater transparency for algorithmic and high-frequency traders

* Introduce a graded risk-suitability test before allowing retail participation in F&O

Such measures would ensure that only investors with adequate knowledge, risk appetite, and financial capacity enter this high-risk segment, thereby preventing disproportionate losses.

Conclusion

The market’s sharp reaction to the STT proposal reflects discomfort with higher transaction costs, but the broader objective of protecting retail investors is valid. However, to effectively curb speculative excesses and prevent systematic wealth transfer from small investors to sophisticated players, a more comprehensive regulatory approach is required. Raising STT is a start but it cannot be the end.

(Ashwani Mahajan is a professor at PGDAV College, University of Delhi, and the national co-convener of the Swadeshi Jagran Manch.)

Views are personal and do not represent the stand of this publication.