The recently-announced increase in the Securities Transaction Tax (STT) by Finance Minister Nirmala Sitharaman during the Budget presentation for the upcoming fiscal could be counterproductive if the government intends to curb speculative activity in futures and options (F&O), according to Nithin Kamath, founder and chief executive of Zerodha.
In a post on social media platform X on February 2, a day after the Budget, Kamath argued that higher STT rates are more likely to skew trading further toward options rather than reduce overall speculation, given how the tax is structured across derivatives products.
STT hike in Budget
With a view to discouraging small investors from speculative trading in derivatives, Sitharaman announced a steep hike in STT. According to a PTI report, the government expects to collect ₹73,700 crore through STT in FY27. It is likely to mop up ₹63,670 crore in the current fiscal, lower than the previous estimate of ₹78,000 crore.
In her Budget speech, Sitharaman said the STT on futures contracts will be raised to 0.05% from 0.02%. Meanwhile, STT on options premiums and exercise of options are proposed to be raised to 0.15% from 0.1% and 0.125%, respectively.
This announcement had met with a knee-jerk reaction from the equity market as Sensex and Nifty 50 lost over 2.5% in intraday deals.
Options already dominate F&O trading
While the government looks to protect retail investors from speculation in the F&PO market, as a Sebi study shows 92% of them lose money in the derivatives trade, Kamath believes it is unlikely to produce the desired results.
“I don’t know the exact reasoning behind the increase in STT. Having said that, if the goal was to reduce speculative activity in F&O, then I’m not sure this will do anything,” he said in a social media post.
He highlighted that nearly 95% of derivatives trading volumes in India are concentrated in options. Kamath noted that the latest STT increase would rather push the share of options trading higher, as the STT increase disproportionately affects futures.
In an older tweet attached to this post, Kamath had highlighted that STT is levied on the full contract value of futures, while options continue to be taxed largely on the premium. As a result, any increase in STT makes futures progressively less viable compared with options.
Kamath said that options are inherently more speculative than futures, but the impact of the STT hike mostly falls on futures.
Uncertainty from repeated hikes
According to Kamath, frequent and incremental increases in STT also create uncertainty for brokers and traders alike.
“The other problem with the uncertainty from steady STT hikes is that, at some point, you’ll start seeing a material impact on trading volumes because transaction costs make trading unviable. You’re already kinda seeing that with futures,” Kamath said.
A case for alternative reforms
If the objective is to rein in speculation, Kamath suggested that introducing product suitability norms — defining who can trade complex derivatives — may be a more effective approach than repeatedly raising transaction taxes.
I know it’s an unpopular opinion, said Kamath, adding, “It’s a much better approach than a death by a thousand STT hikes.”
In his older post, too, Kamath had argued that boosting activity in cash equities and futures could be a better policy goal than trying to suppress options trading.
“STT were brought down for cash and futures, and intraday leverage was increased (from the minimum 20% now to as much as futures), I think the trading volumes in cash and futures would automatically go up. It is a much better strategy to increase cash/futures volumes than to reduce trading volumes in options,” he had said last year.
Disclaimer: This story is for educational purposes only. The views and recommendations expressed are those of individual analysts or broking firms, not Mint. We advise investors to consult with certified experts before making any investment decisions.
