Budget’s STT hike, lack of positive triggers batter stocks as market slumps 2%

In her Budget speech, Finance Minister Nirmala Sitharaman said the government proposed to raise the STT on futures to 0.05% from 0.02% to provide “reasonable course correction in F&O segment in the capital market and generate additional revenues for the Government”.

Meanwhile, STT on options premiums and the exercising of these options is proposed to be raised to 0.15% from 0.1% and 0.125%, respectively. Speaking to reporters after the presentation of the Union Budget in Parliament, Revenue Secretary Arvind Shrivastava said the reasoning behind the move to hike STT for the F&O segment was to discourage speculative tendencies.

As per the Budget, the Centre is aiming to collect Rs 73,700 crore from STT in 2026-27, up from the revised estimate of Rs 63,670 crore for the current fiscal. The Budget estimate for STT collections in 2025-26 is Rs 78,000 crore.

Futures and options are essentially instruments that are based on underlying company stocks or indices — hence called derivatives — and allow two parties to agree to trade a security at a later date at a predetermined price. This can help traders to protect themselves from unexpected stock price movements.

“The STT hike caught the market off guard, exacerbating the impact of relentless FII (foreign institutional investor) outflows,” said Vipin Kumar, Assistant Vice President of equity research at Globe Capital Market. “Although this volatility is likely temporary, such moves inevitably bruise investor confidence causing broad based selling,” Kumar added.

According to Nilesh Shah, Managing Director at Kotak Mahindra Asset Management and a part-time member of the Economic Advisory Council to the Prime Minister, while the market was driven by the reaction of speculators to the STT proposal, Indian markets have “already been subdued on account of high valuation amid high single-digit or low double-digit earnings growth”.

“While the Budget has several key announcements that will augur long-term growth prospects, execution and implementation will remain key,” Shah added.

The hit to the Indian stock market comes at a time when foreign investors are already pulling out money to the tune of billions of dollars. According to latest data, FIIs dumped Indian shares worth $4 billion in January alone — the sixth time in the last seven months that they had net sold Indian stocks. In 2025, net FII outflows were almost $19 billion.

Sunday’s proposal to hike STT is the latest move by the government to curb trading in equity derivatives by retail investors, who are known to make huge losses in the pursuit of outsized gains.

According to a study by the Securities and Exchange Board of India (Sebi) released last year, individual traders’ losses in equity derivatives in 2024-25 widened by 41% to Rs 1.06 lakh crore from Rs 74,812 crore in 2023-24. Even more worryingly, the average loss per retail trader in the last quarter of 2024-25 rose to Rs 57,920 from Rs 34,606 in the first quarter. This was despite the number of unique traders falling 20% year-on-year between December 2024 and May 2025 compared to a 24% growth between December 2023 and May 2024. This suggests that those traders who decided to stay in the market made even larger losses

At the same time, the Sebi study had pointed out that in 2023-24, the gross profit of proprietary trading firms from equity derivatives rose to Rs 33,037 crore.

The F&O losses of India’s small traders gained global attention during US-based proprietary trading firm Jane Street’s April 2024 legal battle in the US over what it said was its confidential and “most profitable” trading strategy. It was then that Sebi began looking into the firm’s activities for any market abuse and said it had manipulated stock indices and made ‘unlawful gains’ to the tune of Rs 4,844 crore.

F&O trade volumes have already crashed in India’s equity derivatives segment following a crackdown by the capital markets regulator in October 2024. According to data from the World Federation of Exchanges, from a peak of 12.94 billion in October 2024, the total number of F&O contracts traded on the NSE collapsed nearly six times to 2.3 billion by February 2025. Since then, trade has risen marginally and totalled 3.18 billion in the final month of 2025.

The impact of the Budget’s STT proposal was felt especially hard by stockbrokers and depositories, with the likes of Billionbrains Garage Ventures —the parent company of Groww – Angel One, and Central Depository Services closing 5-9% lower. These companies derive a large part of their revenue from fees collected from F&O traders. A higher STT will deter trade in the segment and impact their revenue and profits. Shares of BSE also slumped 8% as the listed exchange will be adversely impacted by fewer derivatives trade.

Ahead of the Budget’s presentation, Nithin Kamath — the founder of broker Zerodha, had said on X on January 30 that as a market participant, “I always hope the budget will reduce STT, but it keeps going up”.

Banking stocks were also badly hit, with Sitharaman announcing in her Budget speech that a high-level committee would be set up to review the sector with an eye on the government’s Viksit Bharat target and to align it for the next phase of growth.

Meanwhile, information technology stocks soared on certain Budget proposals related to safe harbour. Being eligible for safe harbour reduces compliance and litigation for IT companies. Healthcare stocks also gained as Sitharaman announced a scheme to promote India as a hub for medical tourism services by establishing five Regional Medical Hubs.

Shares of BSE-listed sports equipment maker Cosco India surged 8% on a proposal that called for a “dedicated initiative for sports goods that will promote manufacturing, research and innovation in equipment design as well as material sciences.”