The Union Budget 2026–27 has quietly changed the economics of trading in India’s derivatives market. By raising Securities Transaction Tax (STT) on both futures and options, the government has added a small cost to every trade, but over time, that small cost can meaningfully influence how traders behave, how funds design strategies, and how platforms earn their revenues.
Using insights from Motilal Oswal Financial Services’ post-Budget analysis, this article explains what has changed, who feels the impact the most, and what it could mean for the future shape of India’s Futures & Options (F&O) ecosystem.
What Changed in Budget 2026?
The government increased STT rates across both segments of the derivatives market:
Instrument
Pre-Budget Rate
New Rate
Futures
0.02%
0.05%
Options
0.10%
0.15%
STT on futures is charged on the full contract value, while STT on options is charged only on the premium. This distinction matters because it explains why large futures trades feel the impact much more sharply than small option trades.
On paper, the government’s goal is straightforward: derivatives markets have grown large enough to become a reliable source of tax revenue. STT collections are projected to rise from Rs 522 billion in FY25 to Rs 737 billion in FY27.
But higher transaction taxes often do more than raise revenue. They subtly shape market behaviour. By increasing the cost of frequent trading, the policy nudges participants to think twice before rolling over positions or placing high-volume, short-term bets.
Who Feels the Impact the Most?
Futures Traders: Cost Compounds Quickly
For a futures trade worth Rs 10 million, STT rises from Rs 2,000 to Rs 5,000, an extra Rs 3,000 per trade.
On a single trade, this looks modest. But for institutional desks that roll positions multiple times a week, this cost compounds. Over a month, it can become a meaningful drag on returns, especially for strategies that rely on thin margins.
Options Traders: A Two-Speed Impact
The STT hike creates a clear split between retail and institutional participants.
Retail Example (Premium of Rs 5,000)
Extra cost: Rs 2.5 per trade
Practical impact: Barely noticeable for most small traders
Institutional Example (Premium of Rs 10 million)
Extra cost: Rs 5,000 per trade
Practical impact: Forces funds and prop desks to reassess trade frequency and position sizing
This difference helps explain why options trading may continue to grow among retail participants, even as large players become more selective.
What History Tells Us
When STT was last raised in October 2024, futures and options moved in opposite directions:
Segment
MoM Change
Futures Volume
-1%
Options Volume
+15%
This suggests traders gravitated toward options, which require less capital and offer defined risk. If the same pattern repeats, India’s derivatives market could become even more options-driven, with futures playing a more specialised role for hedging and institutional strategies.
The Quiet Pressure on Arbitrage and Funds
Arbitrage and derivative-based funds live on small price differences. Their success depends less on big market moves and more on efficiency.
Higher STT raises the ‘break-even line’ for these strategies. Some trades that once made sense may no longer clear the profitability threshold unless market gaps widen. Over time, this could reduce the number of low-risk, low-return strategies in the market.
Trading platforms and exchanges earn more when traders trade more. That makes them sensitive to even small changes in market activity.
Motilal Oswal’s analysis suggests that if overall volumes fall by around 10%, FY27 earnings could drop by:
Angel One: ~13%
Groww: ~7%
BSE: ~9%
This shows how a tax change aimed at traders can ripple through the entire market ecosystem.
Market Discipline vs Market Liquidity
Supporters of the STT hike argue it may improve market quality by discouraging excessive, short-term speculation. Fewer rapid-fire trades could mean more thoughtful positioning.
Sceptics worry about the other side of the trade-off: if high-volume participants pull back, liquidity could thin out. In volatile markets, that can mean wider spreads and sharper price swings.
The real test will be whether participation remains broad enough to keep markets deep and resilient.
Key Takeaways
The STT hike looks small per trade but adds up quickly for large and frequent traders.
Retail options trading remains relatively affordable, which may keep participation high.
Arbitrage and low-margin strategies face higher break-even levels.
Brokerages and exchanges are sensitive to any slowdown in volumes.
The Bigger Picture
Budget 2026 sends a clear signal: derivatives trading is now a core part of India’s financial system and a meaningful contributor to government revenue.
Whether the STT hike leads to a more disciplined market or a less liquid one will become clearer over time. For now, one thing is certain, every basis point matters more than before. In this new environment, understanding costs is no longer just good practice. It is a competitive advantage.
Source: Union Budget 2026–27, Motilal Oswal Financial Services (MOFSL)
*The article is for information purposes only. This is not investment advice.
