For this article:

2 Feb 2026·Source: The Hindu
5 min
EconomyNEWS

STT Hike on Derivatives: Markets Dip, Experts See Reduced Speculation

Increase in STT on derivatives trading impacts traders and reduces speculation.

STT Hike on Derivatives: Markets Dip, Experts See Reduced Speculation

Photo by CHUTTERSNAP

The Nifty 50 index declined by 1.96%, closing at 24,825.45, after Finance Minister Nirmala Sitharaman announced an increase in the securities transaction tax (STT) on derivatives trades in the Union Budget 2026-27. The NSE opened lower, and almost all sectoral indices decreased, except for Nifty IT, which increased by 0.57%. The BSE Sensex 30 fell by 1.88% to 80,723. The STT on Futures is proposed to increase to 0.05% from the present 0.02%. STT on options premium and exercise of options are both proposed to be raised to 0.15% from the present rate of 0.1% and 0.125% respectively. Experts observed that this was a step in the right direction as the STT rise comes on the back of persistent retail participation in the derivative market. A SEBI white paper published last year stated that 9 out of 10 people lose money, adding up to ₹1 lakh crore, in the derivative trade segment. The increase in tax rate is intended to reduce speculation in the segment and is also expected to reduce volumes in the derivative market.

Key Facts

1.

Nifty 50 decline: 1.96%

2.

STT on Futures: 0.05% (proposed)

3.

STT on options: 0.15% (proposed)

UPSC Exam Angles

1.

GS Paper 3 (Economy): Taxation, financial markets, regulatory bodies

2.

Connects to syllabus topics on Indian Economy, resource mobilization, and financial market regulation

3.

Potential question types: Statement-based, analytical questions on the impact of STT

Visual Insights

More Information

Background

The securities transaction tax (STT) is a tax levied in India on the purchase and sale of securities listed on stock exchanges. It was introduced in 2004 to broaden the tax base and reduce tax evasion in securities transactions. The tax is charged on both the buyer and seller, depending on the type of security traded. The introduction of STT aimed to create a more transparent and efficient market by reducing the incentive for off-market transactions. The structure and rates of the securities transaction tax (STT) have been revised multiple times since its inception. These changes reflect the government's efforts to balance revenue collection, market efficiency, and investor sentiment. The initial rates were different from the current rates, and adjustments have been made based on market conditions and policy objectives. The government often considers the impact of STT on trading volumes and market participation when making these changes. These changes are usually made through amendments in the annual Finance Bill. The legal framework for the securities transaction tax (STT) is primarily governed by the Securities Transaction Tax Act, 2004. This act specifies the securities that are subject to STT, the rates at which the tax is levied, and the procedures for its collection and administration. The act also empowers the central government to make rules and regulations for the effective implementation of the tax. The administration of STT is overseen by the Central Board of Direct Taxes (CBDT).

Latest Developments

The recent hike in securities transaction tax (STT) on derivatives is part of a broader trend of regulatory measures aimed at curbing excessive speculation in the Indian stock market. There has been growing concern about the high level of retail participation in derivatives trading, with studies indicating that a significant proportion of retail investors incur losses. The increase in STT is intended to make derivatives trading more expensive and less attractive for speculative activities. This move aligns with the recommendations of various market experts and regulatory bodies to promote more responsible investment behavior. Several stakeholders have expressed differing views on the impact of the increased securities transaction tax (STT). While some experts believe that it will help reduce speculative trading and protect retail investors, others are concerned that it could lead to a decline in trading volumes and liquidity in the derivatives market. There are also concerns that higher transaction costs could make the Indian market less competitive compared to other global markets. The RBI and SEBI are closely monitoring the market's response to the STT hike to assess its overall impact. Looking ahead, the government is expected to continue to refine its regulatory approach to the stock market, balancing the need to promote market development with the objective of ensuring financial stability and investor protection. Future policy measures could include further adjustments to securities transaction tax (STT) rates, enhanced surveillance of trading activities, and stricter enforcement of regulations against market manipulation. The long-term goal is to create a more sustainable and resilient stock market that benefits both investors and the economy as a whole.

Frequently Asked Questions

1. What is Securities Transaction Tax (STT) and why is it important for UPSC prelims?

Securities Transaction Tax (STT) is a tax levied on the purchase and sale of securities listed on stock exchanges in India. Understanding STT is important for UPSC prelims as it relates to the economy and government revenue.

2. What are the proposed changes in STT on Futures and Options as per the recent news?

The proposed STT on Futures is to increase to 0.05% from the present 0.02%. STT on options premium and exercise of options are both proposed to be raised to 0.15% from the present rate of 0.1% and 0.125% respectively.

3. Why is the increase in STT on derivatives in the news recently?

The increase in STT on derivatives is in the news as it is part of regulatory measures aimed at curbing excessive speculation in the Indian stock market, particularly due to high retail participation.

4. What is the purpose of levying Securities Transaction Tax (STT)?

The Securities Transaction Tax (STT) was introduced to broaden the tax base and reduce tax evasion in securities transactions, aiming to create a more transparent and efficient market.

5. How does an increase in STT on derivatives impact the stock market?

An increase in STT on derivatives can lead to a decrease in trading volumes and may reduce speculation. As per the article, the Nifty 50 index declined by 1.96% after the announcement.

6. What are the potential pros and cons of increasing the STT on derivatives?

Pros: Reduced speculation and market volatility. Cons: Decreased trading volumes and potential impact on market liquidity.

7. How might the increase in STT on derivatives affect retail investors?

The increase in STT may discourage retail investors from participating in derivatives trading due to higher transaction costs, potentially reducing losses but also limiting profit opportunities.

8. What is the current trend related to STT and retail participation in the stock market?

The current trend involves regulatory measures, including STT hikes, aimed at curbing excessive speculation due to persistent retail participation in the derivative market.

9. Who is Nirmala Sitharaman and what is her role in the context of the STT hike?

Nirmala Sitharaman is the Finance Minister who announced the increase in the securities transaction tax (STT) on derivatives trades in the Union Budget 2026-27.

10. What was the impact on Nifty 50 and BSE Sensex 30 due to the STT hike announcement?

Following the STT hike announcement, the Nifty 50 index declined by 1.96% and the BSE Sensex 30 fell by 1.88%.

Practice Questions (MCQs)

1. Consider the following statements regarding the Securities Transaction Tax (STT) in India: 1. STT is levied only on the seller of securities. 2. The Securities Transaction Tax Act governs the legal framework for STT. 3. The recent STT hike aims to reduce speculation in the derivatives market. Which of the statements given above is/are correct?

  • A.1 and 2 only
  • B.2 and 3 only
  • C.1 and 3 only
  • D.1, 2 and 3
Show Answer

Answer: B

Statement 1 is INCORRECT: STT is levied on both the buyer and seller, depending on the type of security traded. Statement 2 is CORRECT: The Securities Transaction Tax Act, 2004, provides the legal framework for STT. Statement 3 is CORRECT: The recent STT hike is intended to reduce speculation in the derivatives market, as stated in the news summary. Therefore, only statements 2 and 3 are correct.

2. With reference to the recent increase in Securities Transaction Tax (STT) on derivatives, which of the following statements is NOT correct?

  • A.The STT on Futures is proposed to increase to 0.05% from the present 0.02%.
  • B.The Nifty 50 index increased after the announcement of the STT hike.
  • C.The STT on options premium is proposed to be raised to 0.15% from the present rate of 0.1%.
  • D.Experts believe that the STT rise comes on the back of persistent retail participation in the derivative market.
Show Answer

Answer: B

Option B is NOT correct. The Nifty 50 index declined by 1.96% after the announcement of the STT hike, as mentioned in the news summary. Options A, C, and D are correct as they reflect the proposed changes in STT rates and expert opinions mentioned in the summary.

3. Match List I (Tax/Duty) with List II (Levied On) and select the correct answer using the code given below: List I (Tax/Duty) a. Securities Transaction Tax (STT) b. Customs Duty c. Excise Duty d. Goods and Services Tax (GST) List II (Levied On) 1. Manufacture of goods within the country 2. Import of goods 3. Supply of goods and services 4. Transaction of securities in stock exchanges Code:

  • A.a-4, b-2, c-1, d-3
  • B.a-2, b-4, c-3, d-1
  • C.a-1, b-3, c-2, d-4
  • D.a-3, b-1, c-4, d-2
Show Answer

Answer: A

The correct matching is: a. Securities Transaction Tax (STT) - 4. Transaction of securities in stock exchanges b. Customs Duty - 2. Import of goods c. Excise Duty - 1. Manufacture of goods within the country d. Goods and Services Tax (GST) - 3. Supply of goods and services

GKSolverToday's News