Among the various announcements in the Union Budget, the increase in the Securities Transaction Tax on futures and options may easily be overlooked. Although the change is quite small in size and limited in scope, it is economically significant—not due to its potential to generate substantial revenue, but because it provides insight into the evolving perspectives of policymakers regarding risk, speculation, and financial behaviour in an increasingly market-oriented economy.
In the Union Budget 2026-27, the government increased the Securities Transaction Tax (STT) on futures contracts from 0.02 per cent to 0.05 per cent, on options premiums from 0.10 per cent to 0.15 per cent, and on option exercise from 0.125 per cent to 0.15 per cent. These adjustments are not extensive; however, they are intentional, specifically targeting derivatives trading rather than long-term equity investment.
To understand the implications of this measure, it is essential to first understand what the STT actually does. The STT is a transaction-based tax, levied each time a trade is executed, irrespective of whether the trader ultimately realises a profit or incurs a loss. Unlike income tax or capital gains tax, it focuses on activity, rather than outcomes. Consequently, increasing the STT does not penalise success or failure; rather, it raises the cost of frequent participation.
Why derivatives have become a policy concern
In recent years, the futures and options market in India has experienced remarkable growth, primarily driven by increased retail participation. Moreover, the advent of digital platforms has reduced entry barriers, while derivatives enable traders to take on large positions with relatively modest margins. This leverage amplifies both potential gains and potential losses.
From an economic standpoint, the implications extend beyond the trading environment. Deep derivatives markets play a crucial role in price discovery as well as risk management. However, when leveraged trading becomes prevalent among households, particularly with the inexperienced ones, it introduces vulnerabilities. Losses are not confined to the markets; they impact household savings, consumption patterns, and financial resilience. It is within this context that the increase in the STT should be interpreted—not as a critique of the markets themselves, but rather as a reflection on the nature of participation within them.
Also read: India needs derivatives for high economic growth. STT hike is a bad move
What the tax changes—and what it doesn’t
The increase in the Securities Transaction Tax does not prohibit speculative activities, restrict market access, or modify market requirements. Instead, it increases the cost associated with frequent trading, particularly affecting those who engage in high-frequency or short-term trading.
For long-term investors, the impact is minimal, and for institutional entities with substantial balance sheets, the effect is marginal. The primary burden is borne by high-frequency retail traders, for whom transaction costs accumulate rapidly.
Economically, this policy instrument is well-established. Rather than imposing prohibitions or direct controls, the Union Government employs price signals to influence behaviour. By increasing marginal friction, it encourages market participants to reconsider the frequency and scale of their trades without eliminating the trading activity itself. The sufficiency of this approach is open to debate; however, it demonstrates a preference for incremental adjustments over stringent regulatory measures.
Also read: Budget 2026 didn’t address a critical issue—promoting MSME exports & keeping input costs high
Household balance sheets
There exists a less conspicuous macroeconomic factor to consider: Household risk exposure. Recent data indicate that a substantial proportion of retail derivatives traders experience net losses. While losses are a part and parcel of any market, widespread and recurrent losses among leveraged retail participants can lead to broader implications, such as reduced savings and heightened financial stress.
Viewed from this perspective, the increase in the STT serves as a mild deterrent, particularly for impulsive, high-frequency trading. It does not claim that this move will shield individuals from risk, but it does indeed make risk-taking marginally more costly.
It’s important to note that this measure is not devoid of trade-offs. Higher transaction costs can marginally reduce liquidity, and there is always potential for trading activity to shift to less transparent or offshore venues. On top of that, a tax cannot address more profound issues such as financial literacy, platform incentives, or risk disclosure norms.
The most noteworthy aspect of the increase in STT is not its size, but its selectivity. By exempting long-term investments while increasing costs associated with derivatives, the policy implicitly differentiates between various forms of market participation, without making this distinction explicit. This suggests an emerging perspective that, although markets are crucial for growth and capital formation, not all market activities contribute equally to economic stability. In an economy where financial participation is expanding more rapidly than financial literacy, this distinction is likely to become increasingly significant over time.
The modification in the STT will not immediately alter behaviour. However, it signifies a transition from indifference to engagement. It reflects an acknowledgement that, as markets become more complex and households face greater financial risk, the government cannot remain entirely neutral regarding how such risk is assumed. In this context, this small tax increase is less about generating revenue and more about signalling. It indicates that the discourse surrounding markets in India is evolving—cautiously, incrementally, and with a growing awareness of the boundary between financial inclusion and financial excess.
Bidisha Bhattacharya is an Associate Fellow, Chintan Research Foundation. She tweets @Bidishabh. Views are personal.
(Edited by Theres Sudeep)