Taxation of Derivatives Trading in India: Policy Rationale, Revenue Outcomes, and Implications for Market Efficiency.
CB Lisha1, Kruthik U2, Nayden James D’Silva3, Dr Tejaswini S4
1,2,3MBA 25-27, Faculty of Management Studies, JAIN (Deemed-to-be University)
4Assistant Professor, Faculty of Management Studies, JAIN (Deemed-to-be University)
Abstract
The rapid expansion of derivatives trading in India has transformed the structure of financial markets, with futures and options (F&O) emerging as dominant instruments of trading activity. This study examines the taxation of derivatives trading in India, focusing on its policy rationale, revenue implications, and impact on market efficiency. The research adopts a descriptive and analytical approach using secondary data from regulatory bodies, government reports, and academic literature covering the period from 2015 to 2026.
The findings indicate that the growth of derivatives trading has significantly contributed to government revenue, particularly through the Securities Transaction Tax (STT). However, the increasing reliance on transaction-based taxation raises concerns regarding its impact on trading behaviour, liquidity, and price discovery. The study also highlights that higher transaction costs disproportionately affect retail investors, who form a substantial portion of market participants and often incur significant losses.
Further analysis reveals a trade-off between tax rates and market activity, where excessive taxation may reduce trading volumes and limit revenue potential in the long run. In comparison with global markets, India’s taxation framework appears relatively restrictive, potentially affecting market competitiveness. The study concludes that a balanced approach, integrating taxation with regulatory measures and investor awareness, is essential for ensuring sustainable and efficient market development.
Keywords: Derivatives Trading, Securities Transaction Tax, Market Efficiency, Tax Policy, Retail Investors, Financial Markets, India
