STT hike clouds trading volume growth outlook and revenue targets

Last year, the government had projected a record Rs 78,000 crore in STT collections for the ongoing fiscal, a figure that has since been cut by 18 per cent amid a sharp decline in trading volumes

The government is projecting a mop-up of ₹73,700 crore from securities transaction tax (STT) in financial year 2027 (FY27), pencilling in a 16 per cent increase over the revised estimate of ₹63,670 crore for FY26. However, given the steep increase in STT on futures and options (F&O) — the key driver of trading volume — experts have cast doubts over whether Budget estimates (BE) can be achieved.

 

Last year, the government had projected a record ₹78,000 crore in STT collections for the ongoing fiscal, a figure that has since been cut by 18 per cent amid a sharp decline in trading volume.

 

India’s underperformance relative to global markets, along with tighter norms governing F&O trading, is seen as a key reason for the fall in volumes and, in turn, STT collections. Market participants say a similar trend could play out in the coming year as well.

 

“We must be realistic about the impact of STT on capital markets. The STT hike and the removal of dividend set-offs are creating headwinds for markets. They make many high-frequency and arbitrage trades unviable, which will squeeze market liquidity and leverage in the short term,” said Raamdeo Agrawal, chairman and co-founder of Motilal Oswal Financial Services.

 

Starting April 1, STT on futures is proposed to rise from 0.02 per cent to 0.05 per cent, while that on options will increase from 0.1 per cent to 0.15 per cent of the option premium. The levy on the exercise of options will also be raised from 0.125 per cent to 0.15 per cent of the intrinsic value.

 

STT, which forms part of the government’s direct tax collections, is levied on all securities trades carried out on recognised stock exchanges, including equities, futures and options, and equity-oriented mutual funds. Collections from this tax typically rise in tandem with trading volumes, which are closely linked to secondary market performance.

 

Since 2024, this is the second hike in STT by the government.

 

"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," Nithin Kamath, founder of Zerodha, wrote in a social media post.

 

“The industry has been demanding rationalisation of STT, but instead the government has raised the levy. We believe this could weigh on futures and options volumes and negatively impact brokers, depositories and exchanges,” said a note by BNP Paribas.