Union Budget 2026: How Change in STT Going to Impact Mutual Funds?

The Union Budget 2026–27, tabled on February 1, 2026, left income-tax slabs unchanged and continued to emphasise capital spending and manufacturing-driven growth. For capital market participants, however, the most notable announcement was a substantial hike in the Securities Transaction Tax (STT) on derivatives.

Although there were no direct changes to mutual fund taxation, the increase in STT is likely to shape trading behaviour and have indirect implications for certain fund categories.

Specifically, STT on futures was raised from 0.02% to 0.05%, while options now attract 0.15% on the premium, up from 0.1%, along with corresponding changes at the time of exercise. These revisions materially increase the cost of high-frequency derivatives trading.

Market participants largely see this as a measured policy intervention rather than a punitive step—one aimed at curbing excessive speculation without disrupting the broader investment tax framework.

Impact on Arbitrage and Derivative-Driven Strategies

While mutual fund tax rules remain unchanged, funds that rely heavily on derivatives execution are likely to feel the impact of higher transaction costs.

Arbitrage funds and certain Special Investment Funds (SIFs) depend on frequent futures trades to exploit price gaps between the cash and derivatives markets. The elevated STT will compress margins for these strategies, potentially affecting returns, especially in low-spread environments.

Equity Mutual Funds

Budget 2026 did not extend any fresh tax incentives to equity mutual funds. Long-term capital gains exceeding ₹1.25 lakh continue to be taxed at 12.5%, while short-term gains remain subject to a 20% tax, with holding periods unchanged.

That said, the broader macro environment remains constructive. The government’s ₹12.2 lakh crore capital expenditure programme, coupled with initiatives such as Biopharma SHAKTI, is expected to generate sector-specific momentum—particularly for infrastructure, manufacturing, and innovation-focused listed companies.

Also Read: Budget 2026: Can UDAN Deliver Sustainable Regional Air Connectivity?

Debt Mutual Funds

Hopes of a revival of indexation benefits for debt mutual funds were disappointed in this Budget. Accordingly, investments in specified debt funds made on or after April 1, 2023, continue to be classified as short-term, regardless of holding period, and taxed at the investor’s applicable slab rate.

Meanwhile, sustained government borrowing is likely to keep bond yields elevated in the near term. While this could support accrual-based returns, it may also heighten interest-rate volatility for debt fund investors.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. This does not constitute a private 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 are subject to market risks, read all scheme-related documents carefully.