The sharp rise in retail participation in India’s derivatives market and mounting regulatory concerns over speculative trading have emerged as key themes behind the Union Budget 2026 decision to raise the securities transaction tax (STT) on futures and options (F&O).
A Lok Sabha reply by the ministry of finance (MoF) on 2nd February, a day after the Budget presentation, provides official confirmation of the scale of retail activity in derivatives and the nature of concerns flagged by Securities and Exchange Board of India (SEBI), even as the government clarified that the STT hike is not positioned as a direct regulatory response.
Responding to an unstarred question by Bharatiya Janata Party (BJP)'s member of Parliament (MP) Eatala Rajender, the ministry cited SEBI data showing a dramatic increase in retail investor participation in index derivatives over the past few years.
According to the reply given by Pankaj Chaudhary, minister of state for finance, the share of individual investor transactions in index options rose from just ₹2 for every ₹100 traded in the financial year (FY)17-18 to ₹41 for every ₹100 traded in FY23-24. The figures are drawn from a SEBI consultation paper published in July 2024 that seeks to strengthen the index derivatives framework to improve investor protection and market stability.
This surge reflects the growing popularity of options trading among retail investors, driven by easy access through online trading platforms, low upfront capital requirements and the perception of quick gains, the minister added.
Market participants say a large portion of this activity is concentrated in short-dated and expiry-day contracts.
The Lok Sabha reply also confirms that SEBI has formally expressed concerns over the nature of this surge in derivatives trading. According to the finance ministry, the regulator has observed that trading activity on expiry days is largely speculative, with bursts of hyperactivity dominated by individual investors.
SEBI has warned that such speculative behaviour can undermine investor protection and pose risks to broader market stability. The regulator has noted that excessive focus on short-term trading detracts from sustained capital formation, which is essential for long-term economic growth.
However, the finance ministry clarified that these concerns are not specifically expressed in the context of a change in tax policy, underscoring the separation between regulatory oversight and fiscal decision-making.
Against this backdrop, the Union Budget 2026 proposed an increase in STT on derivatives transactions. The income tax (I-T) department subsequently clarified that the higher levy applies only to futures and options, while all other STT rates remain unchanged.
Under the revised structure, STT on futures has been increased to 0.05%, while STT on options has been raised to 0.15%. The higher rates will apply to the sale of options, the sale of options where the contract is exercised, and the sale of futures. The changes will come into effect from 1 April 2026, and will apply to derivatives transactions entered into on or after that date.
The tax department says the increase is justified, given the extraordinarily high volume of speculative trading in the derivatives segment. In a social media post, it noted that the total volume of options and futures transactions in India is more than 500 times the country’s gross domestic product.
While the government has maintained that STT rate changes are examined as part of the annual Budget exercise, market participants view the hike as more than a revenue-raising measure.
Officials and analysts say the move sends a clear policy signal aimed at discouraging excessive short-term speculation, particularly among retail investors, and nudging them towards longer-term investment avenues such as equity delivery and mutual funds.
The STT hike has triggered concern among retail traders, many of whom rely on high-frequency options strategies where transaction costs play a significant role in profitability. Market participants say even a marginal increase in STT can materially alter risk-reward calculations for frequent traders.
At the same time, the government’s messaging suggests alignment with regulatory efforts to rein in speculative excesses without imposing outright restrictions. With retail participation in derivatives now accounting for more than 40% of index options trading, the coming months are likely to test whether higher transaction costs can temper speculative behaviour or merely shift trading patterns within the market.
Earlier in December 2025, Mr Chaudhary, the minister informed the lower house that individual traders incurred net losses of ₹105,603 crore in the F&O segment during FY24-25. Quoting a report by SEBI, the minister stated that losses by individual traders continued to mount in the derivatives segment, with nearly 90% of participants ending the year in the red.
A detailed study released by SEBI in July 2025 revealed that A staggering 91% of individual traders in India’s equity derivatives market lost money during FY24–25.
According to the "Comparative Study of Growth in Equity Derivatives Segment vis-à-vis Cash Market After Recent Measures", net losses of individual traders surged 41% year-on-year (y-o-y) to ₹1,05,603 crore in FY24-25 from ₹74,812 crore in FY23-24, even as participation rose and market volumes remained high. The study analysed trading data of nearly 9.6mn (million) individual investors, accounting for the bulk of participants in the equity derivatives segment (EDS), especially in index options. (
Read: Rs1.06 Lakh Crore Lost by Individual Traders in F&O in FY24-25, Govt Confirms SEBI Action on 4 Entities for Market Abuse)
