The Centre is expecting a ₹10,000 crore bump from securities transaction tax in FY27 following its decision to hike tax on derivatives trade, which led to the worst stock market rout on a Union Budget day in six years, wiping out ₹10 lakh crore in investors’ wealth.

Many market participants have expressed dissatisfaction over the hike in STT at a time when the sentiment is already down, and cautioned that the government may not be able to achieve its target, as there will be a slowdown in derivatives trade used by high-frequency traders such as Jane Street and arbitrage mutual funds.

The government had budgeted to raise ₹78,000 crore from STT in FY26, but it will fall short of the target according to revised estimates, which pegged STT collection at ₹63,670 crore. It is estimated to collect ₹73,700 crore in FY27 according to the budget estimates. The Centre had collected ₹52,196 crore in FY25, the budget document showed.

Samir Arora of Helios Capital observed that the hike in STT for equity derivatives was ill-timed, given the weak sentiment. The Indian market has done very badly in dollar and Euro terms because of rupee depreciation against those currencies, and foreign institutional investors pulled out a record amount from Indian bourses in 2025.

“It (hike in STT) should have been dovetailed with the lowering of long-term capital gains tax or STT for the cash market,” Arora said to CNBC TV18.

Arbitrage impact

The government defended the STT hike as a move to discourage retail investors from dabbling in futures and options trading in stocks, as a study showed an overwhelming majority of them lost money in the process. But the decision will have unintended consequences for many high-frequency traders as it will sharply raise the threshold for high-frequency strategies to be profitable since taxes account for about a quarter of their costs, and can make India less competitive for derivative-heavy foreign flows.

The tax hike, aimed at maintaining market integrity, follows a series of steps by market regulator Securities and Exchange Board of India, which introduced several curbs and also took on US trading giant Jane Street Group LLC over alleged market manipulation.

High-frequency trading firms thrive on huge volumes and razor-thin margins. The STT hike alters the cost structure of strategies built around speed, scale and minimal holding periods. These firms typically act as market makers or arbitrageurs, executing thousands of trades a second to profit from tiny price discrepancies.

Arbitrage funds

Arbitrage funds, which have gained popularity as tax-efficient investment options compared with liquid funds, will see 25-30 basis points (0.25-0.3 per cent) shaved off from their annual returns.

Arbitrage mutual funds are hybrid funds that generate profits on the ‘arbitrage’ between the cash and futures markets.

These funds buy stocks in the cash market and simultaneously sell them in the futures market at a higher price to generate returns from the difference in the price of the security in the two markets.

These funds offer a near risk-free return from equity markets and are taxed at a concessional rate as capital gains from equity.

In contrast, liquid or debt funds get taxed the same as fixed deposits, or at the marginal rate.

Arbitrage funds have given between 6.75 per cent and 7.5 per cent return on average in the last year.