F&O Trading to Get Costlier from April 1, 2026, Due to STT Hike and New RBI Norms

Trading in equity derivatives, specifically Futures and Options (F&O), in India is slated to become considerably more expensive starting April 1, 2026. This significant change stems from a two-pronged approach by the government and the Reserve Bank of India (RBI) aimed at moderating speculative activity within the market. The measures include a substantial increase in the Securities Transaction Tax (STT) on F&O trades and the implementation of tighter lending norms for brokers. The government, as part of its Budget 2026-27 proposals, has raised the STT on futures contracts by a remarkable 150%, increasing it from 0.02% to 0.05% of the transaction value. For options, the STT on premiums will rise from 0.10% to 0.15%, representing a 50% hike, while the tax on the exercise of options will also increase from 0.125% to 0.15%. These revised STT rates will directly translate into higher trading costs for participants in the derivatives segment. In addition to the STT hike, the RBI's tighter lending norms for capital market intermediaries, including brokers, will also come into effect from April 1, 2026. These norms mandate that all credit facilities extended to brokers must be fully secured with 100% collateral. This move is expected to reduce the leverage available to proprietary traders, who heavily rely on bank-backed funding and guarantees for higher trading exposures, thereby increasing their cost of capital. The primary objective behind these combined measures, as stated by Finance Minister Nirmala Sitharaman in her Budget 2026 speech, is to provide a 'reasonable course correction' in the F&O segment and to curb excessive speculation, especially by retail investors. Studies by the Securities and Exchange Board of India (SEBI) have consistently indicated that a significant majority (over 90%) of retail participants tend to incur losses in F&O trading. The government's stance is to protect small investors from these speculative losses, rather than primarily driving central revenues. Market experts and brokers anticipate a noticeable impact on trading volumes. Ankur Jhaveri, MD & CEO - Institutional Equities, JM Financial Institutional Securities, projects a potential drop of 15-20% in overall equity derivatives volumes, which could also lead to increased impact costs in the cash market. Dhiraj Relli, MD & CEO at HDFC Securities, specifically expects derivatives volumes to decline by around 20% for retail participants and closer to 30% when proprietary traders are included. The futures segment is projected to experience sharper cuts in trading activity compared to options, mainly because the STT on futures is levied on the entire transaction value, making the outgo substantially higher. The increased transaction costs are expected to particularly affect retail traders and high-frequency traders, who engage in frequent transactions. Roop Bhootra, whole-time director, Anand Rathi Share and Stock Brokers, highlighted that the higher tax would increase trading, arbitrage, and hedging costs, potentially impacting overall liquidity and cost in derivatives. For proprietary and high-frequency trading firms, which are major contributors to market volumes, the combination of higher STT and reduced leverage presents a 'double whammy'. Some analysts suggest that while there might be an initial dip in volumes, especially in high-frequency and intraday trades, the long-term impact on overall market sentiment might be mild, with volumes eventually stabilizing as traders adapt to lower-frequency strategies. There is also an expectation that institutions and high net-worth individuals (HNIs) using futures for hedging might shift towards creating 'synthetic futures' through options strategies, as it could become a comparatively cheaper alternative given the new tax structure. It's important to note that these changes in STT specifically target the F&O segment and will not impact equity delivery and intraday transactions. The timing of this hike, amidst existing market volatility due to geopolitical tensions, could further compress margins for traders. This policy aims to encourage more selective trading and reduce excessive leverage in the market. This marks another instance of STT adjustments, with a previous hike also coming into effect from April 1, 2023, where STT on the sell side of futures trades increased from 0.01% to 0.0125%, and on options from 0.05% to 0.0625%. The current revisions underscore a continuing regulatory focus on the derivatives market in India.

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