STT hike, algo curbs, buyback tax: New market rules kick in from April 1

India’s capital markets entered a new regulatory phase on Wednesday, with a sweeping set of changes spanning derivatives taxation, algorithmic trading, broker funding norms and mutual fund disclosures—moves aimed at curbing excessive speculation while nudging investors toward longer-term participation.

The reforms, driven by the Securities and Exchange Board of India (Sebi) and the Reserve Bank of India (RBI), come into force at the start of FY27 and are expected to reshape trading strategies, especially in the high-volume derivatives segment.

STT hike reshapes F&O trading

At the centre of the changes is a sharp increase in securities transaction tax (STT) on futures and options (F&O), announced in the Union Budget by Finance Minister Nirmala Sitharaman.

STT on futures has been raised to 0.05 per cent from 0.02 per cent—a 150 per cent jump—while options premiums now attract 0.15 per cent tax, up from 0.10 per cent. STT on exercised options has also been increased to 0.15 per cent from 0.125 per cent.

The structure disproportionately impacts futures, where the levy is applied on notional contract value rather than premiums. Market participants expect some migration toward options-based synthetic futures strategies as traders look to optimise costs.

New margin rules tighten leverage

Sebi’s revised margin framework mandates that at least 50 per cent of the required margin for F&O trades must be maintained in cash, with the remainder allowed in non-cash collateral such as pledged shares.

The change raises upfront capital requirements for traders, particularly retail participants and leveraged strategies. Only free cash, liquid mutual funds and overnight funds qualify as cash margin, while equities and equity mutual funds are excluded.

Buyback gains face higher tax

In another significant shift, a flat 12 per cent surcharge will now apply to capital gains earned from share buybacks, covering both individual and corporate shareholders.

The move increases the effective tax burden compared to the earlier slab-based surcharge system, where lower-income brackets either paid no surcharge or faced reduced rates. The change is expected to make buybacks relatively less attractive as a capital return mechanism.

RBI tightens broker funding norms

The RBI has also introduced stricter lending rules for brokers, aimed at strengthening risk controls in the financial system.

Banks must now ensure that all lending to brokers is fully collateralised, with enhanced daily monitoring. For bank guarantees issued to exchanges, at least 50 per cent must be backed by collateral, including a minimum 25 per cent in cash.

Haircuts on equity collateral have been raised to 40 per cent, effectively reducing the value of pledged shares and increasing the collateral burden.

Crucially, bank funding for proprietary trading by brokers has been curtailed, limiting a key source of leverage in the system. However, the implementation of stricter bank guarantee norms has been deferred to July 1, offering temporary relief.

Algorithmic trading under tighter oversight

Sebi has rolled out a comprehensive framework for algorithmic (algo) trading, bringing greater accountability and traceability to automated strategies.

All algos must now be approved by exchanges through brokers and assigned unique identification numbers, which will be tagged to every order. Retail API users will be required to declare their strategies, register static IP addresses, and comply with stricter authentication protocols, including mandatory two-factor authentication.

Additionally, algo providers must be empanelled with exchanges, and brokers will be responsible for monitoring and maintaining detailed records of all algorithmic activity.

Mutual fund disclosures revamped

The regulator has also overhauled mutual fund expense disclosures, introducing a Base Expense Ratio (BER) that isolates fund management fees from other charges.

Asset management companies will now have to separately disclose transaction-related costs such as brokerage, STT and stamp duty—previously bundled under the Total Expense Ratio (TER). Governance standards have also been tightened, with expanded responsibilities for trustees and senior management.