During the Union Budget, Finance Minister Nirmala Sitharaman announced a significant increase in the Securities Transaction Tax (STT) levied on derivatives trading, causing quite a stir among traders and brokerages, which will come into effect from April 1, 2026.
The government has increased STT on futures contracts to 0.05% from 0.02%—a 150% increase. On options, the tax on premiums has gone up to 0.15% from 0.10%, a 50% rise. The levy on the exercise of options has been increased to 0.15% from 0.125%.
Traders feel this will make several existing strategies meaningfully more expensive and potentially unviable. In practical terms, the cost of placing and closing a single derivatives trade has roughly tripled. Their strategies only work when the cost of trading is very low. With that cost now significantly higher, many of those strategies simply stop making money.
The government's position is that the derivatives segment has grown at a pace that warrants closer attention. India is now the world's largest equity derivatives market by contract volume, with the total notional value of options and futures transactions running at several hundred times the country's GDP.
Regulatory data indicates that over 90% of individual traders in the segment recorded losses in the most recent fiscal year, with aggregate retail losses in F&O reaching nearly Rs 1 lakh crore. The tax increase is framed as a measure to add friction to speculative activity without imposing outright restrictions on participation.
Traders will need to wait for larger price swings to generate the same returns, and many systematic strategies built around speed and volume may need to be recalibrated or retired.
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The concern extends to brokerages as well. India's discount brokerage industry—led by platforms like Groww, Zerodha, and Angel One—was built on a model that offered free or near-free equity delivery trading, subsidised by the high volumes and thin margins generated by retail derivatives activity.
F&O brokerage has historically constituted the majority of revenue for several of these firms. A sustained drop in derivatives trading activity would put direct pressure on their top lines.
The STT revision announced on Sunday is the latest in a series of measures, both regulatory and fiscal, aimed at the derivatives segment over the past 18 months.
Market regulator SEBI introduced a range of structural changes in late 2024 and 2025, including tighter margin requirements, restrictions on weekly expiry dates, higher lot sizes, and increased capital thresholds for options trading. Those changes had already begun to alter behaviour before this latest tax adjustment.
As a result, the number of active users across brokerage platforms fell 10.7%, dropping from 5.02 crore in January 2025 to 4.48 crore by December. This was a clear reversal from 2024, when active users grew 31.15%, rising from 3.82 crore in January to 5.01 crore a year later.
Zerodha, led by Nithin Kamat, saw a decline of 15.2%, ending the year with 68.52 lakh active users, down from 80.82 lakh users. The discount broking pioneer also saw a roughly 11% drop in revenues in FY25.
While Groww maintained its lead as the largest broker by volume, it still shed 8.1% of its active base, dropping to 1.21 crore users from 1.32 crore users in January. The newly listed company has been actively diversifying into lending, asset management, and wealth products to reduce its dependence on F&O volumes.
The changes also mean that high-frequency trading, which relies on making tiny profits on a huge number of trades, may no longer be viable. Large firms, which saw massive growth in early 2025, such as Jane Street and Gravitation Research, might see their expansion hit a wall.
Since taxes make up about a quarter of the costs for these high-speed firms, the higher rates could wipe out their profit margins. If these large players pull back, the market could face lower volumes and less liquidity overall.
Edited by Suman Singh
Original Article
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