Regulation Without Precision

The Union Budget 2026–27 has signalled a shift toward caution in India’s capital markets by hiking the Securities Transaction Tax (STT) on Futures and Options contracts in the Exchange Traded Derivatives (ETD) segment. While the policy aims to curb “excessive speculation”, a closer look at NSE data and market mechanics suggests that this proposed initiative of the GOI/MOF may be penalising market efficiency while ignoring the true nature of equity ownership.

Notional Myth vs Economic Reality

The primary justification for increasing STT on ETDCs is often the “eye-popping” size of the equity derivatives turnover in India. However, there is a fundamental misunderstanding of what these numbers represent. Derivatives data is usually reported in notional turnover — a mechanical calculation based on the full value of the underlying index or stock.

In reality, the actual money at risk is the premium turnover (especially relevant for Options contracts). NSE data for 2025 illustrates this massive disparity:

In the equity options segment, while the headline numbers are vast, retail investors (those with a monthly turnover under ₹10 lakh) accounted for “72 per cent of participation” but contributed to just 2.2 per cent of the premium turnover. Retail derivatives traders comprised 2.8 per cent of the investor base at NSE in any given month.

Viewed through the lens of premiums rather than notional value, India’s Options market looks far more modest than the headlines suggest. In 2025, Options premium turnover was only about two-thirds of cash-market turnover.

The number of derivatives traders has dropped since December 2024.

Out of the STT/CTT collected by NSE for the nine months ended December 2025, 56 per cent was contributed by the equity cash segment, while only 44 per cent came from the equity derivatives segment.

By taxing the notional value, the government is essentially placing a levy on a reference point rather than the actual capital deployed.

Impact on Market Participation

The hike in STT is significant. STT on Futures contracts has risen from 0.02 per cent to 0.05 per cent (as per the ANMI submission to the Finance Ministry, it was 0.0125 per cent till October 2023), while Options STT (on premium) has jumped from 0.10 per cent to 0.15 per cent (it was 0.0625 per cent for sell premium). For Futures traders, it is estimated that STT now accounts for nearly 84 per cent of their total transaction costs, effectively doubling the cost of trading due to the sharp increase in STT. The purists, in recent articles, have argued that “increasing STT on Futures and Options is aimed at curbing specific speculative activity, especially amid high retail involvement and increasing leverage”. It is pertinent to note that data from NSE (especially related to the contribution to premium turnover and the overall investor base) suggest that these arguments are not at all justified.

This has led to a visible “volume stress”:

NSE equity derivatives contract volumes plummeted from a peak of 12.94 billion contracts in October 2024 to roughly 2.3 billion by February 2025 — an 82 per cent decline. They recovered to 3.18 billion contracts later in 2025.

The number of active individual derivatives traders has also stagnated, with the share of the registered investor base trading F&O dropping to around 2.8 per cent. Over the past 12 months, their share has ranged from 2.7 per cent to 3.3 per cent of total investors.

The “Speculation” Misdiagnosis

If the intent is to protect retail investors from speculative losses, the data suggests that the current approach is misaligned. Derivatives are rarely standalone bets; they are often used to hedge cash positions. Notably, 80 per cent of derivatives traders also trade in the cash market. Here, the purists have rightly pointed out that the costs related to the equity cash market, which supports long-term ownership, have not fallen. STT on delivery-based equity trades remains the same and is applied equally at both entry and exit, regardless of holding duration or investment goal. It can therefore be argued that there is a structural bias that favours frequent trading over lasting ownership. ANMI has also raised this issue (in its submission to the MOF), urging a rationalisation of STT in the equity cash segment.

By raising the friction of trading, the Budget risks:

* Reducing liquidity: Higher costs discourage proprietary traders and market makers who provide the “buy–sell” spreads that retail investors rely on.

* Penalising delivery: While the Budget targets derivatives, it does little to reward long-term behaviour. Delivery-based equity trades are taxed at both entry and exit, regardless of how long the investor holds the stock.

* Encouraging offshore migration: When domestic transaction costs become globally uncompetitive, institutional volume (including participation by FPIs) often shifts to offshore venues where such taxes do not exist. Market experts have opined that “where derivatives trading is pushed into costlier or more restrictive environments, activity shifts to overseas exchanges, bilateral markets or informal structures. Regulators then lose visibility and control — precisely the opposite of what investor protection demands”.

* Brokers and investors have also pointed out the long list of charges payable by investors for transactions in Indian markets — brokerage, STT, exchange transaction charges, stamp duty, SEBI turnover charges, depository charges (for delivery-based transactions), and GST. To add to this, we have to consider dividend tax and capital gains as well (where applicable) — certainly a long list which, when put together, works out to a reasonable percentage of the transaction value.

A Need for Precision

India’s capital markets have matured significantly, with household wealth in equities recently reaching over ₹84 lakh crore. However, treating “scale” as a problem leads to blunt fixes like the STT hike. Further, as per the SEBI Investor Survey of 2025, 37 per cent of Indian households are still not aware of securities market products. Any further increase in taxes will dent the overall household penetration of securities market products in India (currently at 9.5 per cent, as per the SEBI survey). Further, as barriers to investment, 10 per cent of market intermediaries have cited the cost of transactions as a stumbling block.

A more practical approach — focused on suitability norms, better risk disclosures, and perhaps reducing taxes on long-term delivery positions — would better serve the goal of building a nation of “owners” rather than just “traders”. Suitability norms can ensure that complex products are offered only to investors who understand the risks. Disclosure and risk warnings can be further improved and enforced stringently. Until then, the STT remains a tax on the optics of volume rather than the reality of risk.

The writer is a fellow member of the Institute of Cost Accountants of India. Views expressed are personal