With the FY26 fiscal set to end on Tuesday, investors are gearing up for several reforms, including revised Securities Transaction Tax (STT) rules that will come into effect from April 1.
Many brokers, traders and demat account holders are concerned about the sharp increase in STT on futures and options (F&O) trades, following revisions announced by Finance Minister Nirmala Sitharaman in the Union Budget FY26-27. She had also proposed a significant increase in charges on options.
STT on futures has been raised to 0.05 per cent from 0.02 per cent earlier.
Similarly, STT on options premium and exercise has been increased to 0.15 per cent from the current rates of 0.10 per cent and 0.125 per cent, respectively.
According to experts, the increase in STT — particularly in the derivatives segment — is likely to act as a marginal negative for foreign portfolio investor (FPI) flows in the near term, especially for high-frequency and derivative-focused global funds.
“As per post-Budget changes, the hike in STT meaningfully increases transaction costs for active trading strategies,” they said.
Experts noted that recent data already show FPIs turning 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 backdrop, a higher STT could further reduce post-tax returns, making India relatively less attractive for short-term and derivative-oriented foreign flows, they added.
However, analysts said the impact on long-only, fundamentally driven FPIs is likely to be limited, as their investment decisions are guided more by earnings visibility, currency stability, and policy predictability.
That said, higher transaction costs could marginally shift some global allocations towards other Asian markets, particularly at a time when India is also facing competition from AI-led capital flows to the US, Taiwan, and South Korea.
“While the STT hike may boost tax collections, it could dampen trading volumes and slow tactical FPI participation,” experts said, adding that sustained inflows would depend more on macro stability, rupee movement, and policy consistency.
Market participants also said the increase in STT, effective April 1, came as a surprise to some sections.
“The hike will impact retail and high-frequency traders as transaction costs rise significantly. While this may influence certain trading strategies at the margin, broader market participation trends are expected to remain intact,” they added.
However, several analysts said that the proposed hike in STT on derivatives have a limited short-term impact on trading activity, with long-term market behaviour expected to remain largely unchanged. They noted that the increase in STT will raise trading costs, particularly for retail participants and high-frequency traders, potentially leading to a temporary decline in futures and options (F&O) volumes.
“Higher transaction costs could weigh on retail participation in the near term, though past trends suggest that activity typically stabilises after an initial dip,” market experts said.
