STT hike: Fourth time’s a charm

In today’s Finshots, we look at whether increasing STT will curb the derivative madness.

The Story

At this point, anyone who opens a stock brokerage app in India is reminded of the same statistic at least once a day: over 90% retail derivatives traders lose money.

It flashes as a warning, a disclaimer, sometimes even as a half-hearted deterrent. And yet the volumes keep rising.

Against that background, the government’s latest step in the latest Union Budget deserves closer attention.

It has proposed to increase the Securities Transaction Tax (STT) on equity futures from 0.02% to 0.05%, and on the sale of options from 0.10% to 0.15%, effective April 1, 2026. In absolute terms, this translates to futures STT rising from ₹0.0 crore and ₹0.0 crore options. STT from ₹ 10,000 to ₹ 15,000 per crore.

On the face of it, it seems almost trivial. To most investors, these numbers sound distant and abstract. Because you start noticing the difference only when you trade in sizes close to a crore, and very few retail investors have that kind of capital in their demat accounts. So it’s tempting to dismiss the hike as noise.

But the timing, the targeting and the language used by policy makers suggest something more deliberate.

You see, if the intention was to hurt institutional traders or support firms (own trading enterprises), this move would be strangely ineffective. Because for large institutions, STT is a minuscule line item along with much higher costs. They trade through algorithms, manage execution efficiently and often operate at scales where marginal transaction costs barely register. A few basis points of extra STT does not materially change their behavior.

The real action in derivatives markets over the last few years has come from somewhere else.

From FY22 to 25, the number of retail traders in the derivatives market increased by more than 120%up from approx 45 lakh in 2022. SEBI has repeatedly pointed out that more than 90% of these traders lost money in FY25. This is where the STT hike is really aimed. Because retail intraday traders are hit the hardest as a higher STT eats into their already thin margins.

The government itself was quite explicit about this. In interviews after the budget, officials framed the increase as a way to “bring discipline to speculative volume” and to “align the tax regime with long-term capital formation goals.”

That wording makes it clear that it is not primarily an income measure, even though the rise is expected to be around ₹10,000 crore to the exchequer in FY27.

What we see is a behavioral tax. It is designed to make excessive intraday and short-term speculation slightly more expensive, especially for high-frequency retail traders who repeatedly short out options contracts.

There is also an important conceptual point that is often missed in this discussion. Despite its name, STT is not really a ‘tax’ in the traditional sense. This is because taxes, by their very nature, are usually levied on income or profits. However, STT is paid regardless of whether a trade makes or loses money. In that sense it behaves more like a security transaction charge.

That distinction is important because each increase in STT does two things at once. This reduces the capital available to traders and pulls money out of the market ecosystem entirely.

It eventually exhausts the skeleton ₹10,000 crorewhich does not remain invested or circulate within the markets. And marginally increases the cost of participation for everyone involved.

It also sends three fairly clear signals.

First, policymakers are increasingly uncomfortable with the extent and nature of retail-driven options speculation, particularly in ultra-short-term contracts.

Second, rather than imposing outright bans or hard restrictions, they prefer to incentivize behavior using price signals.

And third, if this approach works even marginally, future interventions are likely to follow a similar tax-linked route rather than direct compliance rules.

This is not the first, or the second or third time this has happened either. STT has been adjusted several times in the past, often following periods of excessive speculative activity.

The question now is whether this round achieves what earlier ones only partially managed.

Probably, yes. Some low-conviction trades will become more expensive, so retail traders may languish. A small subset of traders may think twice before trading with razor-thin expected returns. However, this is unlikely to fundamentally change behavior for people who want to gamble. Because by nature, those who see F&O as a shortcut to quick profits are rarely dissuaded by slightly higher costs.

What the move does succeed in doing is making the government’s position undeniably clear. It does not see derivatives as a retail friendly wealth creation tool. It wants to avoid a situation where a derivative-driven frenzy creates systemic risk or widespread domestic losses, without hitting the brakes to disrupt market functioning in one fell swoop. In that sense, it is a welcome step.

That said, relying primarily on the stick has its limits.

This is because increasing transaction costs may slow activity but does little to improve understanding. Brokers already hold webinars, publish explainers and prominently display risk disclosures. Still, most participants in the derivatives market are first-time traders, and the learning curve remains steep. A one-hour webinar does not equip someone to manage leverage or understand tail risk in complex trading strategies.

A more meaningful intervention would go deeper. Brokers today offer sophisticated tools, APIs and risk management frameworks that most retail traders barely know exist, let alone know how to use properly. Structured and accessible education around risk management, withdrawals and the practical use of these tools can do more to change outcomes than incremental tax increases alone.

For now, the STT increase should be seen less as a revenue grab and more as a regulatory signal. This reflects a growing willingness to use fiscal levers to shape market behavior, particularly in areas where direct restrictions would be politically and economically difficult to justify.

Whether this turns out to be the “fourth time’s a charm” or just another small blip in a long streak will depend on how retail shopping behavior changes next.

So, instead of using the stick that raises taxes, they can extend a carrot, like more meaningful investor education. what do you think

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