In today’s Finshots, we take a look at whether increasing STT will curb the derivatives frenzy.

The Story

At this point, anyone who opens a stockbroking app in India is reminded of the same statistic at least once a day: over 90% retail derivatives traders lose money. 

It flashes as a warning, a disclaimer, sometimes even as a half-hearted deterrent. And yet, the volumes keep rising.

Against that backdrop, the government’s latest move in the latest Union Budget deserves closer attention.

It has proposed raising the Securities Transaction Tax (STT) on equity futures from 0.02% to 0.05%, and on the sale of options from 0.10% to 0.15%, effective April 1, 2026. In absolute terms, this translates to futures STT rising from ₹2,000 to ₹5,000 per crore, and options STT from ₹10,000 to ₹15,000 per crore.

On the surface, this looks almost trivial. For most investors, these numbers sound distant and abstract. Because you only start noticing the difference if you are trading in sizes close to a crore, and very few retail investors have that kind of capital in their demat accounts. So it is tempting to dismiss the hike as noise.

But the timing, the targeting, and the language used by policymakers suggest something more deliberate.

You see, if the intention was to hurt institutional traders or prop firms (proprietary trading firms), this move would be oddly ineffective. Because, for large institutions, STT is a minuscule line item along with much higher costs. They trade through algorithms, manage execution efficiently, and often operate at scales where marginal transaction costs barely register. A few basis points of extra STT does not materially change their behaviour.

The real action in derivatives markets over the last few years has come from somewhere else.

From FY22 to 25, the number of retail traders in the derivatives market has grown by over 120%, up from about 45 lakh in 2022. SEBI has repeatedly pointed out that over 90% of these traders lost money in FY25. This is where the STT hike is really aimed. Because retail intraday traders are hit hardest, as a higher STT eats into their already thin margins.

The government itself has been fairly explicit about this. In post-budget interviews, officials framed the increase as a way to “bring discipline to speculative volume” and to “align the tax regime with long-term capital formation goals”. 

That wording makes it clear that this is not primarily a revenue measure, even though the hike is expected to add roughly ₹10,000 crore to government coffers in FY27.

What we are seeing is a behavioural tax. It is designed to make excessive intraday and short-term speculation slightly more expensive, especially for high-frequency retail traders who churn options contracts repeatedly.

There is also an important conceptual point that often gets missed in this discussion. Despite its name, STT is not really a ‘tax’ in the traditional sense. This is because taxes, by nature, are usually levied on income or profits. However, STT is paid regardless of whether a trade makes money or loses it. In that sense, it behaves more like a securities transaction charge.

That distinction matters because every increase in STT does two things at once. It reduces the capital available to traders and pulls money out of the market ecosystem altogether. 

This eventually depletes the estimated ₹10,000 crore, which does not stay invested or circulate within the markets. And marginally raises the cost of participation for everyone involved.

This also sends three fairly clear signals. 

First, policymakers are increasingly uncomfortable with the scale and nature of retail-driven options speculation, particularly in ultra-short-term contracts. 

Second, rather than imposing outright bans or hard restrictions, they prefer to nudge behaviour using price signals. 

And third, if this approach works even marginally, future interventions are likely to follow a similar tax-linked route rather than direct compliance rules.

This is not the first, or the second, or the third time this has happened, either. STT has been tweaked multiple times in the past, often after periods of excessive speculative activity. 

The question now is whether this round achieves what earlier ones only partially managed.

Probably, yes. Some low-conviction trades will become more expensive, so retail traders may wane off. A small subset of traders may think twice before entering trades with razor-thin expected returns. However, it is unlikely to fundamentally change behaviour for people looking to gamble. Because by nature, those who see F&O as a shortcut to quick profits are rarely dissuaded by slightly higher costs.

What the move does succeed in doing is making the government’s stance unmistakably clear. It does not see derivatives trading as a retail-friendly wealth creation tool. It wants to avoid a situation where a derivatives-driven frenzy creates systemic risk or widespread household losses, without slamming the brakes to disrupt market functioning in one go. In that sense, this is a welcome move.

That said, relying primarily on the stick has its limits.

This is because raising transaction costs may slow activity, but it does little to improve understanding. Brokers already run webinars, publish explainers, and display risk disclosures prominently. Yet most participants in the derivatives market are first-time traders, and the learning curve remains steep. A one-hour webinar does not equip someone to manage leverage or understand tail risk in complex trading strategies.

A more meaningful intervention would go deeper. Brokers today offer sophisticated tools, APIs, and risk-management frameworks that most retail traders barely know exist, let alone know how to use properly. Structured and accessible education around risk management, drawdowns, and the practical use of these tools could do more to change outcomes than incremental tax hikes alone.

For now, the STT increase should be seen less as a revenue grab and more as a regulatory signal. It reflects a growing willingness to use fiscal levers to shape market behaviour, especially in areas where direct restrictions would be politically and economically harder to justify.

Whether this turns out to be the “fourth time’s a charm” or just another small nudge in a long series will depend on how retail trading behaviour changes next. 

So, instead of using the stick that is increasing taxes, they could extend a carrot, such as more meaningful investor education. What do you think?

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