Union Budget bets on long-term wealth over short-term gains

Finance Minister Nirmala Sitharaman introduced major changes in the way securities, shares and investments are taxed in the Union Budget 2026-27. The Budget increases the tax on derivative trades.

What is the net effect of a Securities Transaction Tax (STT) raise on derivative contract on retail investors and brokers? Will the intended effect pan out?

In Budget 2026, the Finance Minister increased the STT by 150%, from 0.02% to 0.05%. In case of future trades, if you trade one lot of Nifty futures, and Nifty is currently trading at 25,000 levels, you pay around ₹325 as STT on this trade. But with the new rates, you will need to pay ₹812 as STT. That is an extra ₹487 per lot. For 10 trades a month, that is an extra ₹4,800 per month. For 25 trades, it is ₹12,000 extra per month, and for 50 trades, it is ₹24,000 extra per month.

For most retail traders, the hike in options STT is the bigger hit because it targets the premium paid. Now, every time you buy or sell an option, you will be paying 50% more tax on the premium. For one Nifty option contract, the premium is ₹100. Under the current regime, one pays ₹0.10 as STT (0.1% of ₹100 premium). Under the new rates, this increase to ₹0.15 (0.15% of ₹100 premium), an increase of ₹0.05 per contract. For 10 trades, that is an additional ₹0.50 in tax (₹0.05 x 10 trades). For 25 trades, that is ₹1.25 extra and for 50 trades, the trader pays ₹2.50 more.

In short, if a trader is scalping and targeting small price movements, his or her breakeven point just moved up. The trader will now need a larger price movement just to cover the additional tax, making it harder to stay profitable over time.

The STT hike will increase trading costs, particularly for high-frequency traders and scalpers who rely on small price movements to profit. This could lead to a shift away from short-term speculative trading, pushing more retail investors towards long-term investment strategies.

Unlike retail traders, brokers will be hit by this move. Brokers may experience a decline in transaction volume as retail activity in high-frequency trading decreases due to the increased cost. This could reduce their commissions and transaction fees. However, brokers might also see an opportunity to offer more educational resources, guiding retail investors towards more sustainable investment strategies. Operationally, brokers will need to adjust their platforms to comply with the new tax rates, adding to their complexity and cost. Overall, the intention behind raising STT is likely to reduce speculative trading, especially short-term, high-frequency trades in derivatives like options. By increasing the cost of speculative trading, the government is encouraging retail investors to take a more measured approach. This could shift some focus toward long-term wealth-building activities.

How will the changes in buyback income affect shareholder income and companies?

The recent changes to buyback taxation are advantageous for both retail and promoter investors in terms of absolute returns. Under the law, the previous regulation treated the buyback value (sale consideration) as dividend income, taxing it at the individual’s applicable slab rate, while not allowing a deduction for the cost of acquisition. For individuals in the 30% tax bracket, the absolute return from a buyback (calculated as Sale value – Purchase cost – Buyback tax) was significantly lower than selling in the open market. This was because the purchase cost was treated as a capital loss, resulting in a much smaller tax benefit. The new law treats buyback as a capital gain, taxing it at special rates: 20% for short-term gains and 12.5% for long-term gains for retail investors. While corporate promoters (22%) and non-corporate promoters (30%) face higher tax rates on their gains compared with retail investors, these rates are still beneficial on an absolute basis when compared with the existing, older tax structure.

(Archit Gupta is founder and CEO of Clear Tax)