Explained: How the STT hike on equity futures and options affects traders and investors

If you’ve been trading Futures and Options (F&O), Budget 2026 just changed the game. Starting April 1, 2026, Securities Transaction Tax (STT) rates will go up.

While STT is a small amount per trade, understanding its overall impact is important to accurately calculate the return and cost. So, here’s what the STT rate hike could mean for you as a trader or investor.

But first, let’s start with the basics of STT: what it is, why it is applied and how it is calculated with practical examples.

What is STT?

STT is a direct tax charged by the Government on buying or selling securities (stocks, derivatives and mutual funds) on recognised stock exchanges like the NSE and BSE. Simply put, STT is a transaction fee or tax you pay to the government every time you trade stocks or derivatives. It is paid per transaction, just like you pay brokerage, GST, stamp duty and other charges.

It is important to note that STT is charged on turnover, not on profit. What this means is, irrespective of whether you make a profit or a loss on the transaction, STT still applies. In that sense, it is more like a securities transaction ‘charge’, rather than a ‘tax’ in the traditional sense.

Why was STT introduced?

STT was originally introduced in India in 2004. The idea behind imposing STT was to simplify the taxation of securities, curb tax evasion and replace the long-term capital gains tax (LTCG). However, in Budget 2018, the government brought back LTCG tax on listed shares, while continuing to levy STT. The coexistence of both resulted in a dual tax burden. In Budget 2026, there were strong market expectations of an STT rollback, but that didn’t happen. Instead, STT rates were hiked. In Budget 2026, STT on options premium was raised from 0.10% to 0.15%, while STT on futures saw the biggest jump from 0.02% to 0.05%.

In fact, since Budget 2023, STT on options has more than doubled (from 0.0625% to 0.15%), while futures STT has increased 4x (from 0.0125% to 0.05%).

STT changes in Budget 2026

STT rates vary depending on the type of trade. Here’s the snapshot view of the STT hike in Budget 2026.

STT rates remain unchanged for equity delivery or intraday trades. The revised rates are applicable only on derivatives. Besides, STT does not apply to the following:

• Commodity derivatives (gold, silver and other commodities)

• Currency futures and options

• Off-market transactions

• Debt securities and debt mutual funds

• Unlisted securities

• Immediate stock market reaction to STT hike

On Budget day, the announcement of higher STT rates prompted an immediate negative market reaction.

SENSEX fell by 1.88%.

NIFTY50 fell by 1.96%.

NIFTY Midcap 100 fell by 2.24%.

In fact, the SENSEX suffered its largest single-day loss on the Budget day – roughly 1,500 points. Why so? Because traders, particularly high-volume retail traders, view STT hike as negative for liquidity and retail trading activity. Short-term index F&O are typically traded for hedging, arbitrage and speculative purposes. And, the STT hike means a higher cost of trading for regular F&O traders, which in turn impacts their overall profitability.

Impact of STT hike on your trading cost (with examples)

Let’s understand the real-world impact of the hike in STT in Budget 2026 with hypothetical examples.

Strike price: 25,000 | Lot size: 65

Contract value: 25,000 × 65 = ₹16,25,000

Trade: You sell 1 lot of NIFTY futures (exit or initiate a short)

STT comparison:

Old STT (0.025%): 16,25,000 × 0.02% = ₹325

New STT (0.05%): 16,25,000 × 0.05% = ₹812.50

Additional STT cost per 1-lot future sale: ₹812.50 − ₹325 = ₹487.5

STT impact:

If you execute 10 transactions a day, you’ll now pay an additional STT of ₹4,875 per day. This is equivalent to an extra STT of ₹97,500 per month (assuming 20 trading days a month).

Strike price: ₹24,800 | Option premium: ₹150 | Lot size: 65

Total premium turnover: 150 × 65 = ₹9,750 (Note: If an option is sold, STT is charged on the premium value)

Trade: You sell 1 lot of NIFTY option at a premium of ₹150

STT comparison:

Old STT (0.10%): 9,750 × 0.10% = ₹9.75

New STT (0.15%): 9,750 × 0.15% = ₹14.625

Additional STT cost per 1-lot option sale: ₹14.625 - ₹9.75 = ₹4.875

STT impact:

The impact appears insignificant when viewed in isolation. But if you are an active options trader executing 500 trades per month, you’ll now pay an additional STT of ₹2,438/month. The difference becomes significant when you deal in high turnover with thin margins.

NIFTY strike price: ₹24,800 | NIFTY spot price: 25,000 | Lot size: 65

Total intrinsic turnover: (25,000 − 24,800) × 65 = ₹13,000

(Note: If an option is exercised, STT is charged on the intrinsic value, not the premium)

Trade: You sell 1 lot of NIFTY option

STT comparison:

Old STT (0.125%): 13,000 × 0.125% = ₹16.25

New STT (0.15%): 13,000 × 0.15% = ₹19.50

Additional STT cost per 1-lot option exercise: ₹19.50 - ₹16.25 = ₹3.25

STT impact:

The impact appears insignificant when viewed in isolation.

But if you are an active options trader executing 500 trades per month on expiry day, you’ll now pay an additional STT of ₹1,625/month. The difference becomes significant when you deal in high turnover with thin margins.

The primary reason behind the STT hike is to reduce speculative activity in the F&O segment. According to SEBI data, a vast majority of retail traders in the F&O segment incurred persistent losses.

SEBI data reveals:

• 93% of individual F&O traders incurred losses between FY22 and FY24.

• Nearly 91% of individual F&O traders incurred losses in FY25.

These findings raise concerns about excessive speculative activity and financial stress among retail investors. By increasing the STT rate, the policymakers and regulators aim to:

• Reduce excessive speculation: Higher transaction costs are expected to curb overtrading and encourage traders to be more selective with their trades.

• Bring market stability: Reducing the frequency of low-conviction trades is expected to reduce market volatility.

• Generate higher revenue: While this may not be the primary aim, given the huge derivatives trading volume, an increase in STT can act as a steady stream of revenue for the government. The hike is expected to add roughly ₹10,000 crore to government revenues in FY27.

By increasing STT, the government makes one thing clear. It doesn’t see derivatives trading as a retail-friendly wealth creation tool. It wants to prevent a derivatives-driven frenzy that could create a systemic risk or widespread household losses. In that sense, it’s a welcome move.

Who would be most affected by the STT hike?

While the STT hike is universally applied, its real impact varies widely across market participants, depending on trading frequency, scale of operations and strategy. Here’s who would feel the most burnt.

• Retail F&O traders: Active retail traders who execute several derivative transactions will have to bear higher trading costs and lower net returns per trade.

• High-frequency traders (HFTs): High-frequency and algorithmic traders, who generate profits through tight spreads and high turnover, may suffer in performance as their trading strategy depends on very low marginal costs per trade.

• Weekly options traders: Weekly options (expiring weekly) offer lower premiums, but many strategies need frequent rolls, adjustments and re-entries. More churn means more STT.

• High volume traders: Traders trading in bigger lot sizes already have a larger base (for Nifty, it is currently 65). As a result, even a small rate hike can significantly raise costs.

Impact of STT hike on mutual fund investors

The impact of STT hike on mutual fund investors is low. However, since STT is considered an expense, it will decrease the Net Asset Value (NAV) of mutual funds.

Besides, an increase in STT is likely to shape trading behaviour and have adverse implications for certain fund categories. In particular, mutual fund schemes that heavily use futures and options to hedge or take positions in securities markets are likely to feel the impact of higher transaction costs.

Other mutual fund schemes such as balanced advantage funds, equity savings funds and multi-asset funds, are expected to see less severe impact than that of arbitrage funds. Reason being these funds invest only a small portion of their assets under management (AUM) in arbitrage and with less buying and selling frequency.

How should you optimise your trading strategy going forward?

• Update your breakeven math: Add the higher STT into your trading cost and redo your calculations. If your trading strategy relies on lower costs, it’s time to rework your strategy.

• Reduce churn: Higher STT makes scalping less profitable. Consider reducing your daily trade volume to avoid overpaying taxes.

• Track costs per trade: F&O trading costs can quietly add up, and STT is one such cost. It makes sense to track costs trade-by-trade, and not month-end.

• Focus on high conviction trades: Instead of 10 average-conviction trades, focus on 2-3 high-probability setups to avoid overpaying tax.

• Avoid physical settlement of In-the-Money (ITM) options: You can avoid carrying ITM options to settlement, as this adds to your tax liability. You may close out ITM positions before the end of the day on expiry day.

• Increase holding period: You may consider moving away from day trading to swing trading or positional trading, as STT is levied on every entry and exit in derivatives.

Whether you’re a long-term investor or an active trader, factoring STT into your overall trading cost and tax planning leads to better financial decisions. It pays to be a bit more careful and a lot more informed!