Budget 2026: What the STT increase for F&O could mean for traders, investors

The Union Budget for FY 2026-27 was presented by Finance Minister Nirmala Sitharaman on February 1, 2026. Among the many announcements covering taxation, infrastructure, and economic growth, one proposal stood out for market participants — the increase in Securities Transaction Tax (STT) on futures and options (F&O) trading. For retail investors and traders who actively participate in derivatives, this change could directly affect trading costs and behaviour.

Table of contents

• What the Budget said about STT
• What is STT?
• How trading costs may increase
• What does this mean in real terms? An example
• What is F&O trading?
• Why the Centre has raised STT on F&O trading
• How this may impact traders
• How the markets reacted to this news
• Regulations on F&O trading
• STT on mutual funds vs F&O
• F&O in mutual funds
• The long-term perspective for retail investors

What the Budget said about STT

In Budget 2026-27, the government announced a revision in STT rates applicable to equity derivatives, with the stated aim of introducing a “reasonable course correction” in the F&O segment and generating additional revenue.

As per the Budget proposal:

• STT on equity futures has been increased to 0.05% from 0.02%
• STT on options premium has been raised to 0.15% from 0.1%
• STT on the exercise of options has also been increased to 0.15% from 0.125%

These revised rates will come into effect from April 1, 2026, subject to the Finance Bill being passed in Parliament and receiving Presidential assent.

What is STT?

Securities Transaction Tax, or STT, is a tax levied on the purchase or sale of securities such as equities, derivatives, and equity-oriented mutual funds on recognised stock exchanges in India. It is charged automatically by the exchange and collected by the government.

While STT may appear small on an individual transaction, it becomes meaningful when trading volumes are high—particularly in derivatives, where traders may enter and exit positions frequently.

How trading costs may increase

What does this mean in real terms? An example

Consider a retail trader who enters a Nifty options trade with a premium value of ₹1,00,000.

• Earlier STT at 0.10% = ₹100
• New STT at 0.15% = ₹150

That’s an additional ₹50 on a single trade. For active traders, especially those working with slim margins, this increase can add up quickly and eat into net returns.

Example for illustrative purposes only.

What is F&O trading?

F&O, or futures and options, are derivative instruments whose value is linked to an underlying stock or index.

• Futures are contracts that lock in a buy or sell price for a future date.
• Options give the buyer the right—but not the obligation—to transact at a fixed price.

Many retail participants are drawn to F&O because of leverage, which allows them to take large positions with relatively small capital. However, leverage works both ways, magnifying potential losses just as easily as potential gains.

Why the Centre has raised STT on F&O trading

One key reason behind the STT hike is the persistent losses incurred by retail traders in the F&O segment.

According to SEBI’s analyses:

• 93% of individual traders incurred losses in equity F&O between FY22 and FY24. 1

• Around 91% of retail F&O traders ended up in the red in FY25, even as participation remained significant. 2

Sources: 1. SEBI Press Release PR No. 22/2024 dated September 23, 2024; 2. SEBI Research Paper ‘Comparative study of growth in Equity Derivatives Segment vis-à-vis Cash Market After Recent Measures’ dated July 7, 2025.

These figures suggest that, despite broader market growth, the majority of individual participants in the F&O segment have lost money. These findings have raised concerns among policymakers and regulators about excessive speculative activity and financial stress among retail investors. The STT increase appears aimed at discouraging overtrading, especially in short-term options strategies.

How this may impact traders

For retail traders, the immediate impact is higher transaction costs, particularly for:

• Frequent traders
• Intraday and short-term options strategies
• High-turnover trading styles

However, even though the announcement has unsettled sentiment in the derivatives segment, over time, markets are expected to adjust as participants adapt to the new cost structure.

How the markets reacted to this news

Following the Budget announcement, Indian equity markets plunged sharply. The BSE Sensex and Nifty 50 both closed fell by about 2% by the end of trading day. Sunday reportedly recorded the second-sharpest Budget-day plunge since 2014, according to a report in The Indian Express on February 2, 2024.

Regulations on F&O trading

The move comes at a time when SEBI has been tightening regulations around F&O trading in recent years. These include:

• Higher margin requirements
• Revised contract sizes
• Enhanced risk disclosures for retail participants

The intent is to ensure that derivatives are used with a clearer understanding of risk and not as a shortcut to quick profits.

For instance, in May 2025, SEBI issued a detailed circular aimed at improving trading convenience and strengthening risk monitoring in the equity derivatives (F&O) market in light of evolving market dynamics, rising retail participation, growth in short-tenure index options, and heavy trading on expiry days. The reforms aimed to make the F&O segment more transparent and enhance risk assessment.

• Delta-based open interest: Instead of simply counting the number of contracts, SEBI now uses a delta-adjusted measure that reflects the true directional risk of positions across futures and options. This gives a clearer picture of market exposure.
• Redefined Market-Wide Position Limits (MWPL): Position limits for single stocks are now linked to liquidity measures like free float and average daily delivery value, helping ensure derivatives exposure aligns with actual cash market depth.
• Ban-period rules for single stocks: When a stock enters a ban period (due to high open interest), traders must reduce positions rather than create new ones, limiting speculative risks.
• Intraday monitoring: Stock exchanges are required to check position limit usage multiple times during the trading day to catch spikes in exposures early.
• Index derivatives limits: New position caps for index futures and options have been introduced, with phased implementation through 2025.

STT on mutual funds vs F&O

STT is also applicable to equity-oriented mutual funds, but at much lower levels:

• STT on equity mutual fund investments is typically 0.001% on redemption
• There is no STT on debt mutual funds

This highlights an important difference. Mutual funds are designed for potential long-term wealth creation, with professional management, diversification, and regulatory oversight. F&O trading, on the other hand, is largely short-term and speculative in nature.

F&O in mutual funds

SEBI allows mutual funds to use derivatives, but in a defined, limited and tightly regulated manner. Derivatives are to be used mainly for hedging and portfolio management, not speculation. SEBI regulations require that derivative exposure remains aligned with the fund’s stated investment objective, and there are strict limits on the extent of exposure a mutual fund can take. In practice, this means derivatives are used as a supporting tool to manage volatility, not as a primary return-generation strategy.

The long-term perspective for retail investors

While F&O trading entails high risk in the quest for potential quick gains, mutual funds offer an alternate route to investing – one that focuses on the long-term. Mutual funds offer diversification, professional management, and a structure that encourages staying invested across market cycles. Over time, this allows the power of compounding to potentially work, without the constant need to monitor markets, time entries and exits, or manage leveraged positions.

Long-term investing also reduces the impact of frequent transaction costs and behavioural biases that may impact short-term trading decisions. For investors focused on building wealth gradually, rather than chasing short-term market moves, this approach may provide a relatively stable and disciplined path.

Conclusion

The increase in STT on F&O trading in Budget 2026-27 signals a shift towards encouraging more measured participation in capital markets. While the change has unsettled sentiment in the near term, the impact on markets is likely to be temporary. At the same time, for retail investors, this could be an opportunity to reflect on whether long-term investing through mutual funds may be more suitable for their financial journey.