Options boom to face STT hike test from April 1; analysts weigh impact

The recent move on the STT hike is not the first such intervention to discourage retail participation in the derivatives segment.

The increase in securities transaction tax (STT) on futures and options (F&O), announced in the Union Budget 2026-27, will come into effect from April 1, 2026. The government has raised STT on futures contracts to 0.05 per cent from 0.02 per cent, while the tax on options premiums and exercise of options will increase to 0.15 per cent from the current 0.1 per cent and 0.125 per cent, respectively.

 

The move is aimed at curbing excessive speculation in the derivatives segment, particularly among retail investors.

 

Notably, concerns have risen in recent years, with the Securities and Exchange Board of India (Sebi) studies indicating that more than 90 per cent of retail participants suffer losses in F&O trading.

 

 

The recent STT hike is not the first such intervention to discourage retail participation in the derivatives segment. Back in November 2024, Sebi had introduced several measures, including mandatory upfront premium payments, curbs on certain spread benefits, and stricter exposure limits to rein in excessive activity in the segment.

 

Nifty 50 index options premium turnover

 

Despite these measures, trading activity has remained strong. According to BS Research Bureau data, the Nifty 50 index options premium turnover has increased over the past five months. The total index options premium turnover stood at ₹9.13 trillion in November 2025, rising to ₹9.46 trillion in December 2025, ₹11.53 trillion in January 2026, and ₹12.83 trillion in February 2026. As of March 23, the turnover has reached ₹11.42 trillion.

 

The surge in premium turnover can be attributed to the sharp rise in volatility in the markets in recent months, with India VIX rising more than 150 per cent in 2026 so far. In the past month, the volatility index has spiked as much as 75 per cent to hover around the 25 mark.

 

Limited impact of STT hike

 

Analysts said that STT hike may have a short-term impact but it is unlikely to significantly impact long-term trading behaviour.

 

Vinay Rajani, senior technical research analyst at HDFC Securities, said that the increase in STT will directly raise trading costs for retail participants and high-frequency traders, eroding already thin margins.

 

"This could lead to a decline in F&O volumes, but the impact will not last long,” he said, adding that retail participation could dip temporarily. “Short-term retail participation may wane, though institutional hedging could persist. Past hikes have shown temporary softening before stabilisation.”

 

Sachin Gupta, vice president-research, Choice Broking, also echoed similar views as he said that the tax hike is unlikely to derail markets on its own.

 

Options volume activity rises

 

However, the rising options activity is also reflected in volumes. The total number of index options contracts stood at 2.59 billion in November 2025. This increased to 2.99 billion in December and 3.56 billion in January 2026. It, however, slipped marginally in February to 3.55 billion. In March so far, the total number of contracts stood at 2.34 billion.

 

Chandan Taparia, derivatives analyst at Motilal Oswal Financial Services, said that overall volumes may remain resilient despite the increase in STT. He said historical trends show that the STT hike has not materially impacted overall derivatives volumes.

  

"Market turnover has remained stable despite regulatory adjustments,” Taparia said, noting that trading preferences could shift instead. “STT collections increased significantly following rate revisions. This time as well, overall volumes may not decline; instead, there could be a shift in trading preferences,” he explained.

 

Taparia added that higher costs in futures could push traders towards options strategies. “Higher STT in index futures is likely to increase trading costs, prompting traders to move towards options. The impact cost in futures will rise meaningfully, encouraging participants to replicate futures positions through options strategies such as synthetic futures,” he said.

 

He further elaborated that instead of taking a direct futures position, high-frequency traders may use combinations such as buy Call and sell Put, or vice versa, to achieve similar exposure at a lower tax cost.

 

Analysts said brokers may face revenue pressure due to lower volumes in the near term and compressed commissions, which could weigh on capital market stocks. Additionally, foreign institutional investor (FII) flows might thin marginally for derivative strategies, favouring long-only investors, while the government will gain revenue without disrupting the core market structure.

 

STT collection

 

According to the latest provisional data released by the income tax department last week, the government's STT collection increased to ₹55,717 crore (data till March 17 in financial year 2025-26, or FY26), up from ₹53,095 crore in FY25.

 

Sachin said that a shift in how traders approach expiry day strategies may see a change because buying cheap out-of-the-money options will become less attractive as taxes will take a meaningful bite out of already small premiums. Instead, there may be a gradual move toward in-the-money options or more structured strategies like spreads, where the cost impact will relatively be better managed.

 

"Over time, reduced excessive churn could actually help bring more stability to the market. While the immediate effect may feel restrictive, the longer-term outcome could be a more balanced and sustainable derivatives market," he said.