Budget 2026–27: Assessing the Impact of Higher STT on SIFs and AIFs

The Union Budget 2026–27 introduced higher Securities Transaction Tax (STT) on futures and options trades. While the increase may appear marginal for individual investors, it has implications for investment products that rely heavily on derivatives. Products such as Specialised Investment Funds (SIFs), long–short Alternative Investment Funds (AIFs) and strategies using derivative overlays may face higher operating costs, prompting a closer look at how these changes affect returns.

What the Budget Changed?

In Budget 2026–27, the finance minister announced a rise in STT across futures and options contracts. STT on futures trades has been increased from 0.02% to 0.05%. For options, the tax on premium has been raised to 0.15%, while STT on exercise now stands at 0.15%, compared with earlier rates of 0.10% and 0.125% respectively.

These revisions mark a noticeable increase in transaction costs for market participants who trade derivatives frequently.

Why STT Matters for Derivative-Heavy Products?

STT is a direct expense that cannot be offset against profits or adjusted through tax credits. As a result, it reduces net returns irrespective of strategy performance. For investment vehicles that rely on frequent futures and options trades, even small increases in STT can accumulate over time.

This is particularly relevant for products that employ active trading, hedging, or arbitrage strategies where turnover levels are high.

Impact on SIFs and Long–Short AIFs

According to industry participants, the overall framework for SIFs remains unchanged. A senior representative from the mutual fund industry noted that the increase amounts to only a few basis points and is unlikely to materially affect strategies designed for long-term capital growth.

However, strategies that depend on aggressive positioning or high portfolio churn may feel the impact more acutely. In such cases, higher transaction costs could marginally compress returns, though not necessarily alter the viability of the product.

Market Sentiment and Short-Term Trading

Market observers have pointed out that the increase in STT has had a more immediate effect on short-term traders. With expectations of tax stability unmet, some traders have reduced exposure, leading to short-term caution and profit booking in the markets.

This sentiment has contributed to near-term volatility, particularly in segments sensitive to derivatives trading costs.

What Investors May Need to Consider

For investors in SIFs and AIFs, the change underscores the importance of understanding how much a strategy relies on derivatives and turnover. 

Products with moderate trading activity may see limited impact, while highly active strategies could experience a gradual increase in cost drag.

Evaluating portfolio construction, holding periods and risk management approaches becomes more relevant in this context.

Read More: Union Budget 2026: Budget 2026: Securities Transaction Tax (STT) Raised on Futures and Options. 

Conclusion

The increase in STT announced in Budget 2026–27 introduces higher transaction costs for futures and options trading. While the impact on long-term, moderately traded investment strategies may be limited, derivative-intensive and high-churn products are likely to see a measurable rise in expenses. For investors, the change reinforces the need to assess how costs interact with strategy design rather than focusing solely on headline tax rates.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. This does not constitute a personal recommendation/investment advice. It does not aim to influence any individual or entity to make investment decisions. Recipients should conduct their own research and assessments to form an independent opinion about investment decisions.

Mutual fund investments in the securities market are subject to market risks, read all the related documents carefully before investing.