Regulation Without Precision

Raising transaction taxes on derivatives may curb speculation, but it risks weakening liquidity, discouraging participation and penalising genuine hedging in India’s evolving capital markets; writes CMA Suresh

- CMA Suresh

If the intent is to protect retail investors from speculative losses, data suggests that the current approach is misaligned

The Union Budget 2026-27 has signalled a shift toward caution in India’s capital markets by hiking the Securities Transaction Tax (STT) on Futures and Options contracts in the Exchange ‘Traded Derivatives (ETD) segment. While the policy aims to curb “excessive speculation’, a closer look at NSE data and market mechanics suggests that this proposed initiative of the GOI/MOF may be penalising market efficiency while ignoring the true nature of equity ownership.

Notional Myth vs Economic Reality

‘The primary justification for increasing STT on ETDCs is often the “eye-popping” size of the equity derivatives turnover in India. However, there is a fundamental misunderstanding of what these numbers represent. Derivatives data is usually reported in notional turnover — a mechanical calculation based on the full value of the underlying index or stock.

In reality, the actual money at risk is the premium turnover (especially relevant for Options contracts). NSE data for 2025 illustrates this massive disparity:

In the equity options segment, while the headline numbers are vast, retail investors (those with a monthly turnover under 710 lakh) accounted for “72 per cent of participation” but contributed to just 2.2 per cent of the premium turnover. Retail derivatives traders comprised 2.8 per cent of the investor base at NSE in any given month.

Viewed through the lens of premiums rather than notional value, India’s Options market looks far more modest than the headlines suggest. In 2025, Options premium turnover was only about two-thirds of cash-market turnover.

The number of derivatives traders has dropped since December 2024.