As the FY26 fiscal year draws to a close, investors are gearing up for upcoming reforms, including changes to the Securities Transaction Tax (STT) rules set to take effect from April 1. Concerns have arisen among brokers, traders, and demat account holders regarding the significant increase in STT rates for futures and options (F&O) trades, as announced by Finance Minister Nirmala Sitharaman in the Union Budget FY26-27.
The STT on futures has been raised to 0.05 per cent from its previous rate of 0.02 per cent. Similarly, the STT on options premium and exercise has been increased to 0.15 per cent from the current rates of 0.10 per cent and 0.125 per cent, respectively. Experts suggest that this hike in STT, particularly in the derivatives segment, may have a slight negative impact on foreign portfolio investor (FPI) flows in the short term, especially for high-frequency and derivative-focused global funds.
Analysts point out that while the increase in STT could potentially reduce post-tax returns, making India less attractive for short-term foreign flows, its impact on long-only, fundamentally driven FPIs is expected to be limited. The rise in transaction costs due to the STT hike might lead to a marginal shift in global allocations towards other Asian markets, amid increasing competition from AI-led capital flows to countries like the US, Taiwan, and South Korea.
Market participants express surprise at the sudden increase in STT, effective April 1, highlighting concerns about the impact on retail and high-frequency traders as transaction costs escalate. While the hike may influence certain trading strategies to some extent, broader market participation trends are anticipated to remain stable. Analysts predict a temporary decline in futures and options volumes due to the higher trading costs resulting from the STT increase.
