India budget derivatives tax hike slammed shares in special Sunday wipe out session

India’s budget-driven derivatives tax hike is seen as a near-term equity headwind, with investors also disappointed by the lack of immediate measures to stem foreign outflows.

Summary:

• India’s budget proposal to raise taxes on equity derivatives trading is being flagged by analysts and fund managers as a near-term headwind for domestic equities, mainly via higher trading friction and potential liquidity impacts.

• The budget increases the securities transaction tax (STT) on equity futures to 0.05% from 0.02% and on options to 0.15% from 0.10%, lifting the cost of trading in a market where derivatives volumes are large.

• The same package did not include major, immediate measures to entice foreign flows, a key disappointment given ongoing foreign selling.

• Indian equities fell sharply on budget day, reflecting concerns about liquidity, valuation sensitivity, and a lack of foreign-investor “sweeteners.”

• The near-term focus is on whether the tax changes cool activity and whether domestic flows can continue to offset foreign outflows amid a tighter global backdrop.

India’s latest budget proposals have put domestic equities on watch after the government outlined higher transaction taxes on equity derivatives, a move analysts say could weigh on near-term sentiment by raising trading costs without delivering immediate offsets aimed at stabilising foreign portfolio flows.

At the centre of investor concern is a proposed increase in the securities transaction tax (STT) applied to derivatives. Under the budget plan, STT on equity futures rises to 0.05% from 0.02%, while the levy on options premium is increased to 0.15% from 0.10% (with the tax on exercised options also lifted). In practice, this increases friction in a part of the market that plays an outsized role in price discovery and liquidity.

Market participants argue the bigger issue is not only the tax increase itself, but the timing and the policy mix. The budget did not offer major, near-term initiatives designed specifically to draw foreign capital back into Indian equities, despite a backdrop of persistent foreign selling pressure. That omission matters because foreign flows often act as a marginal driver of index performance and sector leadership, especially during periods of global risk repricing.

The immediate reaction was risk-off. Indian equities recorded their worst budget-day decline in six years, with broad-based selling across most sectors, as investors priced in potential impacts on trading activity and earnings sensitivity for market-facing financial firms. A key fear is that higher derivatives costs could reduce volumes and widen spreads at the margin, which can amplify volatility on down days and make rallies harder to sustain.

Strategically, the government appears to be leaning toward cooling speculative excess in an “overheated” derivatives market rather than prioritising flow support. But for equity investors, the near-term question is whether domestic institutional buying remains strong enough to counterbalance foreign outflows, and whether earnings and central bank policy become the dominant catalysts once the budget impulse fades.

Overall, the message from analysts and fund managers is straightforward: a derivatives tax hike can be absorbed over time, but in the near term it risks acting as a drag on sentiment, especially if foreign selling remains active and the policy package lacks immediate confidence-building measures for offshore investors.

—

The big sell-off in Indian stocks tied to the budget tax story occurred on February 1, 2026. Saw India’s main indices post their worst Budget-day performance in six years, with the Nifty 50 down about 1.96% and the Sensex falling around 1.88% as investors sold off broadly and in particular brokers, exchanges and mid-/small-caps amid concerns about higher trading costs and absent measures to support foreign inflows.

This adverse reaction unfolded during a special Sunday trading session held alongside the Union Budget announcement, highlighting how swiftly markets repriced risk once the tax changes were unveiled.

This article was written by Eamonn Sheridan at investinglive.com.