Union Budget 2026 STT Increase Amplifies Challenges for Retail Derivatives Traders
The Union Budget 2026-27 has introduced a significant hike in the securities transaction tax (STT), further stacking the odds against retail individuals engaged in short-term futures and options (F&O) trading. This move raises transaction costs, making an already difficult business even tougher for small traders.
Financial Awareness Over Taxation for Responsible Investing
Bhubaneswar-based finance researcher and former F&O trader Narayan Das emphasizes that financial awareness, not higher taxation, drives responsible investing. With over a decade of experience in derivatives, Das highlights how transaction costs steadily erode retail profits. "Many investors enter high-risk trades without understanding them. Educating people about market risks and diversification is far more effective than trying to curb participation through higher STT or other levies," said the 56-year-old, who is pursuing a PhD in financial literacy.
Impact of Higher Taxes on Breakeven Levels
When transaction costs rise, the breakeven point shifts unfavorably. Mohit Mehra, vice-president at Zerodha, explains: "Take a simple Nifty 50 example. If the Nifty 50 is at 25,000 and your total transaction cost is 0.1%, that’s 25 points gone immediately. Before you make anything, the Nifty has to move more than 25 points in your favour just to break even."
The specific changes include:
- Futures STT rises from 0.02% to 0.05% on contract value, a 150% increase.
- Options STT unifies at 0.15% on both premium and exercise, up from previous rates.
Madhupam Krishna, a Sebi-registered investment advisor, notes these apply uniformly to retail traders, amplifying the impact for frequent short-term positions.
Data Reveals Heavy Losses and High Costs
Between 2021-22 and 2023-24, individuals paid over ₹50,000 crore in transaction costs while trading F&O, according to SEBI data. This includes:
- More than ₹25,000 crore in brokerage.
- Around ₹13,800 crore to the government as STT, GST, and stamp duty.
- Another ₹10,200 crore to exchanges.
Further, Sebi’s July 2025 report showed that nearly 91% of individual retail F&O traders incurred net losses, with average losses around ₹1.1 lakh per losing trader. Ravi Singh of Master Capital Services Ltd. points out that cumulative taxes and charges often turn gross profits into net losses, eroding capital over time.
Behavioral and Economic Consequences
The STT hike makes short-term trading more expensive at every step, pressuring profits that are usually small in F&O. Prashant Mishra of Agnam Advisors warns: "Higher costs only speed up losses for small traders who have limited capital and short time frames."
Nithin Kamath, CEO of Zerodha, suggests the hike may not curb speculation but could reduce trading volumes, especially in futures. Krishna adds that it disproportionately hits futures, potentially accelerating a shift to options.
Repeated losses trigger "loss chasing", where traders divert funds from long-term goals like SIPs or fixed deposits into high-risk bets. A 2024 Sebi study found over 75% of loss-makers continued trading despite prior losses, creating an addiction-like cycle. Prakash Bulusu of IIFL Capital notes this disrupts financial planning and increases vulnerability during market stress.
Mutual Funds as a Resilient Alternative
In this higher-cost environment, long-term investment options like mutual funds become more attractive. They are far less sensitive to transaction costs and short-term volatility. Singh explains: "Unlike F&O, which depends on frequent entries and exits, mutual funds operate with lower portfolio churn and professional management that reduces the impact of taxes and charges on returns."
Mutual funds offer diversification and compounding benefits. Historically, diversified equity mutual funds have delivered an average compound annual growth rate of around 12%, compared to over 90% of retail F&O traders losing money. For example, a monthly SIP of ₹5,000 at a 12% return can grow to ₹1 crore over 20 years.
Krishna highlights tax advantages: mutual funds suit retail investors with long-term capital gains tax benefits, avoiding F&O's business income taxation and speculation risks, making them ideal for goals like retirement or education.
The STT hike underscores the need for financial literacy and disciplined investing, positioning mutual funds as a sustainable path forward for retail investors in India.
