Abstract

Securities Transaction Tax (STT) was introduced as a pragmatic alternative to complex enforcement of capital gains taxation in India’s securities markets. Designed as a low-rate, high-efficiency levy, STT taxes the event of a transaction rather than the resulting income. Union Budget 2026–27, however, marks a notable shift by significantly increasing STT on derivative transactions, while leaving equity transactions untouched. This article examines the conceptual foundations of STT, its differentiated application across market segments, and critically analyses the policy implications of the revised STT rates on futures and options.

I. Introduction

Capital market transactions pose inherent challenges for tax administration due to their volume, speed, and complexity. Securities Transaction Tax addresses this problem by embedding tax collection into market infrastructure itself. For several years, the STT regime—particularly in the derivatives segment—remained stable.

Union Budget 2026–27 departs from this stability by recalibrating STT on futures and options, signalling a renewed focus on derivatives as a revenue and regulatory touchpoint.

II. Concept and Legal Nature of Securities Transaction Tax

STT is a transaction-based levy, triggered by the execution of specified securities transactions on recognised stock exchanges. Its defining features include:

• Event-based liability, independent of income or profit

• Uniform application without regard to taxpayer profile

• Automated collection through stock exchanges and clearing corporations

• Minimal scope for evasion or litigation

Judicially and constitutionally, STT has been accepted as a legitimate policy choice grounded in administrative convenience and market efficiency.

III. Who Bears the Liability to Pay Securities Transaction Tax (STT)?

Securities Transaction Tax (STT) is a statutory levy imposed on specified securities transactions executed on recognised stock exchanges. The liability to pay STT is transaction-specific and fixed by law, independent of profit, loss, or the nature of the taxpayer.

Person Liable to Pay STT — Transaction-wise

• Equity Shares (Delivery-based transactions)
  STT is payable by both the buyer and the seller, each in respect of their respective transactions.

• Equity Shares (Intraday / Non-delivery transactions)
  STT is payable only by the seller.

• Equity Futures Contracts
  STT is payable only by the seller of the futures contract.

• Equity Options Contracts
  – On sale of the option: STT is payable by the seller (option writer) on the option premium.
  – On exercise of the option: STT is payable by the purchaser (option holder) on the settlement price.

• Units of Equity-Oriented Mutual Funds
  – Delivery-based transactions: STT is payable by both buyer and seller.
  – Non-delivery transactions: STT is payable only by the seller.

Collection vs Legal Incidence

Although STT is collected at source by recognised stock exchanges or clearing corporations, the legal liability to pay the tax rests on the buyer or seller as specified above.

Non-Transferability of Liability

STT liability is statutory and non-negotiable. It cannot be contractually shifted or avoided, irrespective of brokerage arrangements or internal cost-sharing.

Key Principle

STT follows the transaction, not the income.

IV. Differential Application of STT across Market Segments

STT does not apply uniformly across all securities. Instead, it reflects the economic nature of the underlying transaction, particularly distinguishing between delivery-based equity trades and derivatives.

Prevailing Securities Transaction Tax (STT) Rates (Post Union Budget 2026–27)

Commentary

Two aspects emerge clearly from the above structure:

1. Equity delivery transactions remain lightly taxed, reinforcing long-term investment and market depth.

2. Derivatives attract materially higher STT, reflecting their leveraged nature, high turnover, and speculative intensity.

The seller-side concentration of STT in derivatives further underscores the legislature’s intent to tax market activity rather than capital ownership.

V. Union Budget 2026–27: Recalibration of STT on Derivatives

The most consequential STT-related change introduced by Union Budget 2026–27 is the upward revision of rates applicable to futures and options, while maintaining complete continuity in the equity segment.

Pre-Budget vs Post-Budget 2026–27 STT Rates: Derivatives Segment

Legislative and Policy Implications

This upward revision represents a quantum change, not a marginal adjustment. Given the scale of derivatives trading, even fractional increases translate into substantial additional transaction costs.

The policy rationale appears threefold:

1. Revenue mobilisation from a rapidly expanding derivatives market

2. Behavioural regulation to discourage excessive speculative churn

3. Administrative efficiency, by relying on an already embedded tax mechanism

Notably, the Government has chosen STT over income-tax-based solutions, reaffirming its preference for certainty and enforceability.

VI. STT on Derivatives and Income Tax: Compounded Fiscal Impact

Derivative gains continue to be taxed as:

• business income, or

• speculative income, depending on statutory classification.

The enhanced STT therefore creates a dual fiscal burden:

• higher transaction-level taxation, and

• unchanged income-level taxation.

This raises concerns for:

• hedging transactions undertaken by corporates,

• market makers, and

• institutional risk managers, who engage in high-volume but low-margin trades.

VII. Market and Corporate Consequences

1. Market Liquidity and Trading Behaviour

The increase in STT may:

• reduce marginal and high-frequency trades,

• compress arbitrage margins,

• incentivise consolidation of trading strategies.

Whether this leads to healthier markets or reduced liquidity will depend on behavioural responses over time.

2. Corporate Finance Perspective

Derivatives are essential for:

• price discovery,

• hedging of business risks, and

• volatility management.

Higher transaction costs in derivatives may indirectly:

• increase hedging costs for corporates,

• influence capital allocation decisions, and

• affect market efficiency.

VIII. Conclusion

Securities Transaction Tax was conceived as a tax of convenience and certainty. Union Budget 2026–27 repositions STT—particularly in the derivatives segment—as a more assertive fiscal instrument.

By increasing STT on futures and options, the Government signals its intent to extract greater revenue from high-velocity market activity while preserving stability in long-term equity investment.

Whether this recalibration strikes the right balance between revenue, regulation, and liquidity will shape the future discourse on transaction taxation in India’s capital markets.

What is beyond doubt is that STT on derivatives has moved to the centre of capital market tax policy under Budget 2026–27.