The proposed hike in Securities Transaction Tax (STT) on derivatives, effective from April 1, is anticipated to have a limited short-term effect on trading activity. Experts suggest that the rise in STT will elevate trading costs, particularly affecting retail participants and high-frequency traders, which could lead to a temporary decrease in futures and options (F&O) volumes.
Market analysts believe that higher transaction costs might dampen retail participation initially, but historical trends indicate that activity tends to stabilize after an initial decline. Despite this, the overall derivatives segment is projected to remain robust, with trading preferences likely to shift rather than experience a sustained drop in volumes.
According to experts, the derivatives market is expected to remain resilient despite the regulatory changes. Past patterns show that such changes have not significantly impacted overall market turnover, although participants may adjust their strategies to manage costs effectively. The total number of index options contracts in March was 234 crore, slightly lower than in previous months.
Higher costs in futures trading could potentially drive participants towards options-based strategies, experts suggest. Traders might increasingly utilize options structures, like synthetic positions, to replicate futures exposure at a reduced tax cost. Brokerages may face short-term revenue pressure due to softer volumes and decreased commissions, while foreign investor activity in derivatives could see a slight moderation, favoring long-only strategies.
The government is expected to benefit from increased tax collections without disrupting the broader market structure. The revised STT on futures and options in the Union Budget 2026–27 will be effective from April 1, 2026. The tax on futures contracts has more than doubled to 0.05 per cent, while STT on options premiums and exercise has also been raised. These changes aim to curb excessive speculation in the derivatives segment, especially among retail investors.
