India’s Union Budget for 2026–27 proposed an increase in the Securities Transaction Tax on equity derivatives, a move that is expected to raise trading costs for futures and options participants and influence short-term market activity.
Under the budget proposals, the Securities Transaction Tax on equity futures contracts was increased to 0.05 percent from 0.02 percent, while the tax on equity options contracts was raised to 0.15 percent from 0.01 percent. The changes apply only to the derivatives segment, with no revisions to cash equity transactions announced.
Securities Transaction Tax is levied on the purchase or sale of securities executed on recognised stock exchanges and is collected at the time of the transaction. The tax was originally introduced to simplify the taxation of securities trading and curb excessive speculative activity. In recent years, derivatives trading volumes have expanded rapidly, making the segment a significant contributor to overall market turnover.
The increase in STT comes at a time when derivatives account for a large share of trading activity on Indian exchanges. Futures and options trading has seen sustained growth, driven by increased participation from retail investors, proprietary traders, and institutional funds. Higher transaction costs may affect high-frequency and short-term trading strategies that rely on narrow margins.
Market participants are also assessing the potential impact on foreign portfolio investors. While derivatives are used by FPIs for hedging and exposure management, higher transaction taxes could influence the cost efficiency of such strategies. However, longer-term capital allocation decisions are typically guided by macroeconomic conditions, earnings outlook, and market stability rather than transaction costs alone.
The budget did not announce any compensatory measures for market participants affected by the higher tax, nor did it signal further changes to securities market taxation. Officials indicated that the increase forms part of a broader effort to strengthen revenue mobilisation while maintaining fiscal discipline.
The STT revision is one of several fiscal measures introduced in the Union Budget 2026–27 and will be closely monitored for its impact on trading volumes, liquidity, and market participation in the derivatives segment over the coming months.
