Top News

Increase in STT will increase trading costs. Image Credit source: ChatGPT

The Central Government has completely changed the economy of derivative trading in India by increasing the transaction tax through Budget 2026. The government has increased the Securities Transaction Tax or STT on equity derivatives, making every deal in futures and options trading costlier; Whether the businessman makes profit or loss. Although the stock market reacted very strongly to this announcement, but the real impact will be clear only when its mathematical analysis is done.

The government has justified the increase in tax by citing the large size of India's derivatives market. The total volume of futures and options trade is more than 500 times India's GDP. With an estimated GDP of around Rs 300 lakh crore, the derivatives business is huge. Policy makers believe that trading has now turned into speculation, and high costs are necessary to reduce this activity. However, market experts argue that derivatives are not just speculative instruments. They are used for hedging, pricing and liquidity support for cash markets.

Now what will be the price of 1 lot of F&O?

By the time the market closed on Sunday, Nifty was at around 24,825. The lot size of Nifty Futures is 65 units. This means that one futures contract represents a notional value of approximately Rs 16.13 lakh. Securities transaction tax on futures is levied on the entire turnover value and not on margins or profits.

Before the budget, the STT rate on futures was 0.02 percent. It was around Rs 325 per trade on one lot of Nifty futures. After the budget, the STT rate has been increased to 0.05 percent. Due to this, the tax on the same trade has increased to approximately Rs 817 per lot. In simple words, each trade in Nifty futures contract now costs around Rs 500 more in STT alone.

Traders often think in index points rather than rupees, so the impact is more pronounced when translated into points. Earlier, STT of Rs 325 meant that a trader needed about a five-point rise in the Nifty to recover the tax cost.

After this increase, the STT (Standard Trade Rate) of around Rs 817 means that the index should rise by around 12 to 13 points to reach break-even on this one charge. This calculation does not include brokerage charges, exchange charges, GST and other legal costs, which further increase the break-even limit.

Experts say that this jump in break-even point is especially important for those short-term traders who depend on small fluctuations in prices. Strategies that previously worked with low margins now require large price swings to remain viable. For many traders, this changes the risk-profit balance of each trade.

What are the costs of options trading?

Options trading has also become expensive, although its methods are different. In options, STT (standard tax) is levied on the premium value rather than the entire contract value. Suppose, Nifty call option is trading at a premium of Rs 100. With a lot size of 65, the total premium value of the contract is Rs 6,500.

Earlier, STT on options premium was 0.10 per cent, i.e. tax of Rs 6.50 per lot. After the budget, the STT rate has been increased to 0.15 percent, increasing the tax on the same trade to Rs 9.75. Although this increase in rupee terms seems minor, there has been an increase of 50 percent in STT. For traders who transact in multiple lots or trade frequently, this increase increases exponentially over time.

The main problem with STT is that it is a fixed, one-time cost. This applies whether the trade is profitable or not. This makes even small increases in interest rates meaningful, especially for high-frequency traders, arbitrage strategies and intraday participants who operate on low margins.

What are the experts saying?

Experts have expressed concern that the increase in transaction costs may reduce market liquidity and not just curb speculation. SAMCO Group's Jimeet Modi argued in the ET report that at a time when India is competing for global capital, raising trade barriers sends the wrong signal. According to him, derivatives markets are important liquidity engines and risk-transfer mechanisms that support the broader equity markets.

There are also concerns about foreign involvement. Due to global risk-free sentiment and rise in US bond yields, FIIs are already withdrawing money from Indian equities. High transaction tax is likely to further reduce returns. This will make India less attractive for derivatives-based strategies used by global funds.