The proposed hike in Securities Transaction Tax (STT) on derivatives, effective from April 1, is likely to have a limited short-term impact on trading activity, with long-term market behaviour expected to remain largely unchanged, experts said.
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.
At the same time, the overall derivatives segment is expected to remain resilient, with trading preferences likely to shift rather than volumes witnessing a sustained decline.
“Historical patterns indicate that regulatory changes have not materially impacted overall market turnover, although participants may adjust strategies to optimise costs,” they added.
So far in March, the total number of index options contracts stood at 234 crore, compared with 259 crore in November 2025, 299 crore in December 2025, and 356 crore in January 2026, before easing marginally to 355 crore in February.
Experts further said that higher costs in futures trading could push participants towards options-based strategies.
“Traders may increasingly use options structures, such as synthetic positions, to replicate futures exposure at a lower tax cost,” they noted.
Moreover, brokerages may witness short-term pressure on revenues due to softer volumes and compressed commissions, while foreign investor activity in derivatives could moderate slightly, favouring long-only strategies.
However, the government is expected to benefit from higher tax collections without disrupting the broader market structure.
The government has revised the STT on futures and options in the Union Budget 2026–27, which will come into effect from the new fiscal year, starting April 1, 2026.
The tax on futures contracts has been more than doubled to 0.05 per cent from 0.02 per cent, while STT on options premiums and exercise has been increased to 0.15 per cent and 0.125 per cent, respectively. The move is aimed at curbing excessive speculation in the derivatives segment, particularly among retail investors.
Notably, concerns have intensified in recent years, with regulatory findings indicating that over 90 per cent of retail participants incur losses in F&O trading.
