The stock market reacted rather violently to the Budget on Sunday, with the benchmark Nifty50 index losing around 2 per cent. It is another matter that Monday saw a sharp recovery. Market participants had urged a cut in securities transaction tax (STT), only to be rattled by the Finance Minister deciding to increase it instead. The STT on sale of future contracts was increased from 0.02 per cent of contract value to 0.05 per cent and STT on sale or exercise of equity option contracts from 0.10 per cent of the option premium to 0.15 per cent. The move will, in fact, benefit the stock market in the long run.
The stock market regulator had been worried about increasing speculative activity in the equity derivative segment since the pandemic, led by individual investors. It had taken a series of actions in FY25 to curb this speculation. This included cutting down the number of weekly index options, increasing derivative contract sizes and asking for upfront margin in equity trades. The STT rates on futures and options were raised 60 per cent in 2024. While equity derivative volumes are down around 25 per cent since the peak in 2024, the share of individual investors trading in the F&O segment continues to be at a record high of 31 per cent, rising sharply over the years vis-à-vis proprietary traders and mutual funds.
The STT increase announced in the Budget will act as a disincentive for these retail traders. For traders in equity futures, the outgo on STT increases 150 per cent while for traders in equity options, the increase is 50 per cent. The higher increase in STT on futures is a good idea as the capital outlay and risk is far higher. If the increase causes traders to shift to options, it is good. While the move can help increase STT collections, which were ₹52,196 crore in FY25 and are projected at ₹63,670 crore in FY26, the primary intent here is perhaps curbing speculative activity. The other important Budget proposal from a stock market perspective is the decision to tax share buybacks as capital gains in the hands of minority shareholders instead of taxing it at their income tax slab rate. This will bring down the tax incidence on investors who fall under the higher tax slabs. The proposal to tax buybacks at 22 per cent for promoters of companies incorporated in India will effectively plug the tax arbitrage between buybacks and dividend, and likely curb such buyback announcements.
There are broader Budgetary positives for investors. Company toplines will benefit from the increased spending on various infrastructure projects such as new dedicated freight corridors, new national waterways, development of infrastructure in tier II and III cities and high-speed rail corridors. Similarly, higher defence outlay will be good for defence stocks and rural consumption will get a leg-up from the allocation to the new rural employment guarantee scheme — VB-G RAM-G.
Published on February 2, 2026