There were several proposals in the Budget which merited discussion on their impact, positive or negative. Long-term growth impulses, short-term pains and many more, as the FM said the Budget was laying down the path till 2047 – the year in which India is forecast to become Viksit Bharat. However, the stock market chose to focus on one single proposal which could directly impact its turnover and probably scale down its income stream.
This one proposal related to the increase in the securities transaction tax on futures and options. Announcing the measures in her Budget 2026 speech, Finance Minister Nirmala Sitharaman said: “I propose to raise the STT on futures to 0.05 per cent from the present 0.02 per cent. STT on options premium and exercise of options are both proposed to be raised to 0.15 per cent from the present rate of 0.1 per cent and 0.125 per cent respectively.” Explaining the rationale for raising the STT, the FM said it was done with a view to protecting investors who were losing heavily in F&O trades.
The market did not buy this reasoning. The initial fear was that the resulting higher impact cost of trades in F&O could deter traders from speculation or hedging. And FIIs, who were anyway in a selling mode, would factor this in as an additional deterrent and drag their feet even more. The market had been expecting some sort of incentive or relief to woo back FIIs. This move was therefore totally unexpected. It triggered a massive sell-off on 1 February, even as the Budget was being announced. The BSE Sensex as well as the Nifty saw a sharp decline of nearly 2 per cent, with the Sensex losing around 1,500 points and total market capitalisation eroding by nearly R9.4 lakh crore. But was this a knee-jerk reaction, more of a sentiment spoiler than anything else?
STT has, over the years, become a very important source of revenue for the government. Receipts from this source during 2025-26 were budgeted at R 78,000 crore. This was scaled down in the revised estimates to Rs63,670 crore, a decline of 18 per cent. The budgeted revenue from STT for 2026-27 has also been scaled down to Rs73,700 crore from the original estimate for 2025-26. One could argue that the STT increase over the revised tax estimate of over Rs10,000 crore could be partially factored in through higher collections from F&O trades.
One view is that STT collections from F&O in 2026-27 could indeed exceed the budgeted estimates on the assumption that F&O trades are largely inelastic and that volumes may not fall as sharply as feared. When perceived earnings run into lakhs, would an increase of a few percentage points really matter? Perceived, because with nearly 90 per cent of traders incurring losses, one would have thought participants would have become more cautious. A SEBI study reported that, on average, traders were losing around R1 lakh per year in F&O, or nearly R8,500 a month. Yet the fact that volumes have continued to grow steadily year after year suggests that traders remain optimistic about making gains, while continuing to generate healthy revenues for brokers and the government.
Many listed brokerages saw significant selling on Budget day, as traders and investors feared that any possible decline in F&O volumes would impact earnings. Shares of Angel One, Nuvama Wealth, Billionbrains Garage (better known by its platform Groww), Motilal Oswal, Aditya Birla Money and Emkay fell between 4 and 8.5 per cent on the day.
Another dampener for the markets was the disallowance of interest on capital borrowed for investing in equity shares and mutual funds. Earlier, a deduction of 20 per cent of dividend income from equity or units was allowed towards interest expenditure while assessing dividend income.
The current Budget has disallowed this from 2026-27. One could argue that investments should ideally be made from savings rather than leveraged funds. This could also lead to a reduction in IPO funding, which many NBFCs and banks had been offering to investors.
More than the actual impact of the proposals, the timing of their introduction has emerged as a major grouse against the ministry. Indian stock markets have been among the poorer performers over the past several months. Instead of introducing even token measures to woo back FPIs, these sentiment spoilers could further delay a recovery in the markets.