On February 1, 2026, the Union government unveiled the Budget for 2026–27. Among the many announcements, one set of changes cut sharply into the heart of India’s financial markets: a sharp increase in the Securities Transaction Tax (STT) on derivatives trading.
Even as the Budget sharpened STT’s edge, it did so on the heels of the Supreme Court having issued notice on October 6, 2025 in Aseem Juneja v. Union of India, a pending challenge to the constitutionality of STT. The petitioner argues that STT, a tax on the act of trading regardless of profit or loss, offends the guarantees of equality, freedom of trade and personal liberty under Articles 14,19(1)(g) and 21 of the Constitution. He also seeks a direction that STT paid during the year be adjusted against capital gains tax at year-end, akin to the manner in which tax deducted at source (TDS) is credited. The Court’s decision to issue notice to the Union places STT on the constitutional anvil two decades after its introduction, precisely when parliament has chosen not to dilute but to strengthen the levy in the derivatives segment.
Our aim in this article is to undertake a preliminary assessment of the viability of this constitutional challenge, while setting out the structure within which courts are likely to examine the challenge to the STT regime.
“Double taxation” as an objection to the imposition of STT resonates immediately with market participants. Traders already pay capital gains tax on their profits. How can the government also tax the very act of buying and selling securities? Isn’t this being taxed twice for the same activity? That instinctive sense of unfairness is easy to sympathise with. The Supreme Court, however, is likely to probe whether the objection holds up under constitutional scrutiny.
Double taxation, in strict legal terms, is the imposition of two taxes (1) on the same property or subject matter, (2) by the same government or authority, (3) during the same taxing period and (4) for the same purpose. STT and capital gains tax, seen side by side, do not appear to fit this mould.
To begin with, the two levies occupy distinct constitutional fields, traceable to separate entries in List I of the Seventh Schedule. STT is anchored in Entry 90 of List I, which empowers parliament to levy taxes on transactions in stock exchanges and futures markets. Capital gains tax, on the other hand, flows from Entry 82, which authorises taxes on income. This leads toward a conclusion that STT and capital gains tax attach to different taxable events. STT is triggered the moment a securities transaction is executed on a recognised stock exchange, regardless of outcomes: profit, loss or breakeven. Capital gains tax, by contrast, arises only when income accrues from the transfer of a capital asset. No gain, no tax.
Besides, Indian constitutional law has long recognised that a single economic activity may embody multiple legally distinct “aspects”, each capable of being taxed separately. This principle, referred to as the aspect theory, is common in Indian tax jurisprudence. More than one tax being triggered by the same economic activity does not per se render the imposts constitutionally invalid. As the Supreme Court recently reiterated, “two taxes/imposts which are separate and distinct imposts and on two different aspects of a transaction are permissible as ‘in law there is no overlapping’.” Therefore, the double taxation objection may rest on uncertain ground. Even more so as double taxation construed in the strict legal sense is not unconstitutional if the levy is supported by legislative competence and does not transgress constitutional limitations.
Arguably, a stronger ground might be afforded by Article 14. STT is blind to outcomes. It taxes a losing trader and a winning trader at the same rate. It also taxes a volume trader and retail trader at the same rate. To market participants, that feels fundamentally unfair. The question, however, is whether the sense of unfairness crosses the constitutional threshold under Article 14. Here, the challenge faces a steep climb. In fiscal matters, Indian courts have traditionally accorded enormous leeway to the legislature in selecting the subject matter of taxation, the persons on whom the burden is imposed and the rates and modalities of the levy. In law, the fact that the economic burden is heavier for some than the others does not vitiate a tax or render it unconstitutional. The judiciary intervenes only where a classification is palpably arbitrary, hostilely discriminatory or bears no rational nexus with the object of the legislation. The test to which STT will be subjected is:
i. whether the classification is founded on an intelligible differentia; what distinguishes persons or transactions grouped together from those left out; and
ii. whether such differentia has a rational nexus with the object sought to be achieved by the statute.
On this footing, the Court could take the view that STT is not a single, flat impost across all market activity. It could rely on Section 98 of the Finance Act, 2004, as amended from time to time, to suggest that the statute appears to differentiate between delivery‑based equity trades, non‑delivery trades, options, futures, equity‑oriented funds and certain offers for sale, prescribing distinct rates, chargeability and valuation bases for each. Given this existing internal classification, it would fall to the challenger to demonstrate, with evidence, that these distinctions are nonetheless insufficient and that the scheme fails Article 14’s two‑fold test of equality.
The changes introduced by Budget 2026 reinforce this point. The increases are not across the board; they are targeted at the derivatives segment. Specifically, the rates at Sr. No. 4, representing the F&O segment, have been proposed to be increased. The sharper hikes in this segment seem to reflect a conscious policy choice to discourage speculative churn, while leaving long-term investing relatively less burdened. In constitutional terms, this may not be construed as a random classification.
The harder question is not about design, but about effect. If the cumulative burden of STT, especially in high-frequency or thin-margin trading, were shown to impose crushing and disproportionate burdens on identifiable classes of participants, a credible Article 14 argument could emerge. But that is an evidentiary case, not a rhetorical one. Courts are unlikely to invalidate a tax because it feels unfair to those who pay it often. A fact-rich record on real-world incidence, cumulative burden and segment-specific impact would be crucial in testing whether STT’s equality footprint is constitutionally benign or veers into manifest arbitrariness.
Article 19(1)(g) guarantees the freedom to practise any occupation or to carry on any trade or business. It is well settled that this freedom is not absolute. Article 19(6) permits the legislature to impose reasonable restrictions in the interest of the general public. Taxation, by its very nature, imposes an economic burden on trade and business. Therefore, a levy does not infringe Article 19(1)(g) merely because it renders an activity less profitable or increases the cost of carrying it on. So long as a tax falls within legislative competence and does not amount to a prohibition of the activity itself, it will ordinarily pass muster under Article 19(1)(g).
The constitutional enquiry is one of degree. Does the levy ‘regulate’, or does it effectively prohibit? A fiscal measure that incidentally discourages certain forms of economic behaviour does not become unconstitutional for that reason alone. As the apex court observed in MRF Ltd v. Inspector, Kerala Government, the restriction must bear a rational nexus to the object sought to be achieved and must not be arbitrary or excessive. The Union might point out that the securities market continues to function with sustained participation, arguing that the tax does not amount to a “prohibition”. Volumes may adjust, strategies may change, but trading as an activity is not chocked off. The tax may deter excessive speculation, but discouragement is not the same as prohibition.
Alongside his constitutional attack on STT, the petitioner advances an alternative plea that is particularly revealing. He asks the Court to direct that STT paid during the year be adjusted against capital gains tax at year-end, much like tax deducted at source. At first glance, this may sound like a modest, even sensible, request.
This prayer does not ask the Court to test STT against constitutional limits. It asks the Court to redesign the tax system. In effect, the petitioner invites judicial creation of a credit mechanism that parliament has not provided. That is not constitutional adjudication; it is a policy proposal.
Courts have long recognised that tax design is an exercise in balancing competing and often conflicting considerations - revenue needs, ease of administration, compliance costs, market behaviour and regulatory goals. Judicial review in this field is, therefore, deliberately restrained and the standards for examining taxation measures are less rigorous than in other contexts. This institutional restraint is grounded in the recognition that courts lack both the expertise and the democratic mandate necessary to calibrate fiscal instruments. The judicial role is, therefore, negative, not creative. As has been observed in comparative constitutional jurisprudence, courts are not tribunals for relief against the “crudities and inequities” of complex economic legislation.
Seen in this light, the relevant constitutional question is not whether allowing STT to be set off against capital gains tax would be fairer, smarter, or more market-friendly. The question is narrower and sterner: does the absence of such an adjustment render the existing STT regime unconstitutional? A preference for a different fiscal design, however appealing in policy terms, does not furnish a constitutional basis for judicial intervention.
The constitutional challenge to STT is not fanciful or besides the point. Taxes are not immune from constitutional scrutiny and Budget 2026 has undeniably raised the stakes. As STT rates climb, questions of proportionality and impact become more acute. If STT is pushed into territory where it materially distorts market functioning or imposes disproportionate burdens on identifiable segments, constitutional arguments would correspondingly acquire greater force. To succeed, a challenge must show more than discomfort, reduced profitability or a sense that the tax is “too much.” It must demonstrate manifest arbitrariness under Article 14, or disproportionate restriction on the freedom of trade under Article 19(1)(g) read with Article 19(6). That is a high bar, and deliberately so.
Kabir Dixit is a Counsel and Sharvil Kala is an Associate at Dentons Link Legal.