India’s markets were shaken on February 1 when Finance Minister Nirmala Sitharaman unveiled the 2026-2027 budget. It proposed Securities Transaction Tax (STT) increases on equity futures to 0.05% from 0.02%, on options premiums to 0.15% from 0.10%, and on exercise options to 0.15% from 0.125%. The Nifty 50 and other market indicators tumbled.
India, which is the world’s largest equity derivatives market, was thrust more deeply into a global debate that has been simmering for decades: Are financial transaction taxes (FTTs) a reasonable policy option for curbing speculation and raising revenue? Or will markets resist and find ways to circumvent them?
Transaction taxes exist elsewhere, notably in the form of a U.K. stamp duty that has been a sore point for financial industry interests. Some U.S. political candidates have supported fractional FTTs, as advocated by economists such as the late Nobel laureate James Tobin. Proposals at the state level have prompted threats by exchanges to relocate (see Will a Financial Transaction Tax Put Markets at Risk?).
India’s new futures STT would be based on notional lot value – for a single Nifty futures contract, that could mean Rs. 800-plus (about $9) per trade, up from Rs. 325 ($4). Options STT is levied only on the premium, keeping the absolute cost per trade smaller, even after the 50% rate increase.
Chandan Taparia
Calculated on the entire lot value, “the futures STT hike is significant compared to options,” explains Chandan Taparia, head of derivatives research, Motilal Oswal Financial Services. “Traders might focus on shifting their futures trading to synthetic option trading – using combinations of calls and puts – to avoid paying the higher STT in the futures segment.”
That behavioral response would be along the lines of what the FTT literature predicts. Taparia notes that in the three prior instances of STT changes, overall market turnover did not fall significantly. This time, “it might not change much in options, but futures trading will get hit, as the cost of STT will be significant. All participants are affected by higher charges, but arbitrage players and high-frequency traders are affected more” because of their large trade sizes.
The “Tobin tax” reasoning – for James Tobin it centered on currency trades – was that “sand in the gears” would temper speculation and enhance market stability. The European Union has repeatedly failed to agree on a bloc-wide FTT, and U.S. legislative proposals have largely stalled.
Sweden’s 1984 FTT, initially 1% on equity trades, is a cautionary benchmark, seen as a catalyst for equities trades migrating to London.
India’s situation differs. There is no geographically close alternative venue for domestic equity derivatives, and the 2024 onshoring of GIFT Nifty trading from Singapore has reduced offshore arbitrage availability.
Nithin Kamath
However, substitution risk still applies; it may just happen within the derivatives complex rather than across borders.
Reacting to the budget reveal, Nithin Kamath, founder and CEO of retail brokerage Zerodha, said on LinkedIn, “If the goal was to reduce speculative activity in F&O [futures and options], then I’m not sure this will do anything. 95% of trading is already in options, and this STT increase will only push that share higher. Why? Because the impact falls mostly on futures, while options are far more speculative than futures.”
Instead of transaction tax increases, he contends, regulators should consider investor-suitability norms to determine who is eligible to trade complex derivatives. “It's a much better approach than a death by a thousand STT hikes.”
India’s F&O boom has been fueled by multiple forces: free mobile broadband from 2016, the introduction of weekly contract expiries, a pandemic-era surge in retail participation, and a wave of largely unregulated social media influencers glamorizing derivatives as a route to wealth creation.
According to a 2025 Securities and Exchange Board of India (SEBI) report, 91% of individual F&O traders lost money in the 2024-25 fiscal year, with cumulative retail losses rising 41% year-over-year to approximately Rs. 1.05 lakh crore, or $12.5 billion. (The 91% loss-making percentage was broadly unchanged.)
A financial expert, speaking off the record, broke down where those retail losses flow: roughly $1 billion to exchanges; a few billion to large online brokerages; $3 billion to $4 billion to high-net-worth or institutional traders in India; and $5 billion to $6 billion to institutional and algorithmic traders, including those operating globally.
“Effectively, this is a $12 billion wealth transfer scheme,” he called it, an amount roughly equal to the India government’s education budget.
Saurabh Mukherjea, founder and chief investment officer, Mumbai-based Marcellus Investment Managers, sees the STT hike as a necessary brake, if an imperfect one. “The way to think about it is, suppose the finance minister had not imposed the STT. How much higher would F&O trading have gone? My reading is it would have gone 20% to 40% higher.
Saurabh Mukherjea
“To that extent, credit to her for putting sand in the wheels” where volumes would have gone still higher.
Mukherjea acknowledged that while higher transaction costs could reduce volumes, other forces are not necessarily constant. Joblessness, economic distress among younger Indians, and a lack of alternative income sources continue to push retail cohorts into F&O investing – with attendant risks for those groups.
There is also a reputational dimension for India’s sizable derivatives sector as the country aspires to be an international financial center. Reflecting significant growth in international trading, the Indian rupee was the 11th-most traded currency in foreign exchange derivatives and 17th in interest rate derivatives as of April 2025, according to an International Swaps and Derivatives Association report.
The GIFT City special economic zone in Gujarat is STT-exempt by design, to attract foreign institutional capital. The latest budget extended that tax holiday to 20 years and cut the post-holiday corporate tax rate to 15%.
As foreign investors and multilateral institutions assess India’s market governance, a remaining question is whether higher STTs comes across as a constructive experiment, mature regulatory discipline, or a blunt instrument tackling a problem it cannot fully solve. But it also may be seen as a test case from the perspective of Washington, Brussels and other capitals.
Sand in the wheels may slow the machine; whether it stops entirely raises altogether different questions.