While mutual fund taxation itself saw no major alteration, the higher STT is expected to influence trading behaviour and, indirectly, certain categories of mutual funds.
The Budget raised STT on futures to 0.05% from 0.02% and on options to 0.15% from 0.1% on premium, with corresponding changes on exercise. This effectively makes frequent derivatives trading significantly more expensive than before.
According to Manish Kothari, CEO, ZFunds, the near 2.5-times increase in STT is likely to act as a natural deterrent for retail investors heavily engaged in F&O trading.
He noted that this could gradually redirect participation toward mutual funds and non-F&O direct equities, which are generally considered more structured and better suited for long-term wealth creation.
Market participants view this as a calibrated policy move rather than a punitive one, aimed at moderating speculative activity without altering core investment taxation.
Impact on arbitrage and similar strategies
Although mutual fund tax rules remain unchanged, the higher STT will affect funds that rely on derivatives execution.
Arbitrage funds and certain Special Investment Funds (SIFs) depend on frequent futures transactions to capture price differentials between cash and derivatives markets. With higher STT, transaction costs for these strategies will rise.
Kothari said this could marginally increase the effective expense burden for investors in such schemes and potentially reduce annualised returns by around 0.20–0.40 percentage points. While these funds will continue to serve as relatively low-risk alternatives to pure equity, their post-tax appeal versus short-term debt products may soften slightly.
Equity mutual funds
Budget 2026 did not introduce new tax concessions for equity mutual funds. Long-term capital gains above ₹1.25 lakh remain taxable at 12.5%, and short-term gains at 20%, with the same holding periods as earlier.
However, the macro backdrop remains supportive. The government’s ₹12.2 lakh crore capital expenditure outlay, along with initiatives such as Biopharma SHAKTI, is expected to create sectoral tailwinds for listed companies, particularly in infrastructure, manufacturing, and innovation-led industries.
Abhishek Bhilwaria of BhilwariaMF (AMFI-registered MFD) described the Budget as one focused on “policy continuity over populism.” In his view, the STT hike reinforces the case for disciplined, systematic investing through SIPs rather than short-term trading.
Debt mutual funds
Expectations that indexation benefits for debt funds might be restored were not met in Budget 2026. As a result, units of specified debt funds purchased on or after April 1, 2023 continue to be treated as short-term irrespective of holding period and taxed at applicable slab rates.
At the same time, elevated government borrowing suggests that bond yields may remain firm in the near term, which could support returns but also introduce interest-rate volatility for debt fund investors.