Trading to get costlier: FM Sitharaman announces STT on derivatives, taxes buybacks as capital gains to curb arbitrage

Trading and certain corporate cash distribution routes are set to become costlier after the government proposed changes to buyback taxation, securities transaction tax (STT) and tax collected at source (TCS) on select goods, signalling a sharper push to curb tax arbitrage and improve compliance.Finance Minister Nirmala Sitharaman, while announcing the measures, said the change in buyback taxation was aimed at addressing misuse of the route by promoters while protecting minority shareholders.

“Change in taxation of buyback was brought in to address the improper use of buyback route by promoters. In the interest of minority shareholders, I propose to tax buyback for all types of shareholders as Capital Gains,” she said.She added that promoters would face an additional buyback tax to discourage tax arbitrage. “To disincentivize misuse of tax arbitrage, promoters will pay an additional buyback tax. This will make effective tax 22 percent for corporate promoters. For non corporate promoters the effective tax will be 30 percent,” she said.Under the revised framework, buybacks will be taxed as capital gains for all shareholders, while the additional levy on promoters is aimed at reducing incentives to route payouts through buyback structures.The government also proposed an increase in Securities Transaction Tax on derivatives trading. “I propose to raise the STT on Futures to 0.05 percent from present 0.02 percent. STT on options premium and exercise of options are both proposed to be raised to 0.15 percent from the present rate of 0.1 percent and 0.125 percent respectively,” Sitharaman said.The changes will raise STT on futures to 0.05 percent from 0.02 percent, while STT on options premium and exercise of options will increase to 0.15 percent. The move is expected to increase transaction costs for derivatives traders, particularly in high-frequency and short-term segments.Alongside these measures, the government outlined changes in the Minimum Alternate Tax (MAT) framework aimed at pushing companies towards the new corporate tax regime.“To encourage companies to shift to the new regime, set-off of brought forward MAT credit is proposed to be allowed to companies only in the new regime. Set-off using available MAT credit is proposed to be allowed to an extent of 1/4th of the tax liability in the new regime,” she said.The government also proposed to fundamentally change the MAT structure going forward.“MAT is proposed to be made final tax. So, there will be no further accumulation from 1st April 2026. In line with this change, the rate of final tax is being reduced to 14 percent from the current MAT rate of 15 percent,” she said.She added that MAT credit accumulated so far will continue to be available for adjustment. “The brought forward MAT credit of taxpayers accumulated till 31st March 2026, will continue to be available to them for set-off as above,” she said.The MAT changes are part of the broader effort to simplify corporate taxation while reducing reliance on exemptions and credit carry-forwards, building on earlier corporate tax reforms aimed at making the tax structure simpler and more predictable.