STT collection estimates: Building castles in the air on shifting sands

To secure fiscal targets, sustaining STT growth remains a high-wire act in a windy market

The government is projecting robust securities transaction tax (STT) collections of Rs 78,000 crore for 2025-26 (FY26). STT collections have grown impressively since Covid-19, thanks to the buoyancy in the equities market. However, the latest projections are viewed as ambitious, given the current market conditions and recent regulatory changes.

 

The latest Union Budget has revised the STT estimate for the ongoing financial year (2024-25/FY25) upwards, from Rs 37,000 crore to Rs 55,000 crore. The Centre expects a 40 per cent increase over the revised figures, marking a 63 per cent growth over the Rs 33,778 crore collected in 2023-24 (FY24).

 

  For FY25, the Centre has already collected Rs 42,000 crore via STT, prompting the upward revision.

  “For FY26, they are projecting a big jump to Rs 77,000 crore, a 40 per cent increase from this year. Since STT rates have not been revised upwards, this increased collection likely assumes a rise in trading volumes. However, with trade volumes declining since June 2024, it is unclear what is expected to change to accommodate the projected increase,” said Mohit Mehra, vice-president of primary markets and payments at Zerodha. 

STT, part of the government’s total direct tax collection, is levied on all securities trades carried out on recognised stock exchanges. These include shares, futures and options (F&O), and even equity-oriented mutual funds. Tax collections via this route rise when trading volumes increase, which is linked to the performance of the secondary market. 

It is crucial that the upward momentum in STT collections is sustained to meet the government’s fiscal arithmetic. 

“Net tax revenues to the Union are expected to grow by 11 per cent year-on-year to Rs 28.4 trillion (FY26 Budget Estimates versus FY25 Revised Estimates/RE), which is faster than the 9.9 per cent growth expected in FY25RE versus FY24 actual. This relies on accelerated corporate tax collection growth of 10.4 per cent to Rs 10.8 trillion, up from FY25’s envisioned 7.4 per cent increase. 

  Growth in income taxes is factored in at 14.4 per cent, with large gains expected in STT collections. While this would be the slowest annual growth rate since the pandemic, it underscores a buoyant expectation given considerable revenue foregone — Rs 1 trillion due to changes in the direct tax code — and the vulnerability of STT collections to market conditions and changing F&O norms,” said a note by SBI Capital Markets.

  “We believe equity market performance this year will also determine revenue collections from capital gains tax and STT, which have risen significantly ($15 billion) compared to the pre-pandemic period ($6.5 billion),” noted Tanvee Gupta Jain, chief 

India economist at UBS Securities. 

Since September, the benchmark Sensex and Nifty have dropped by more than 10 per cent due to concerns over an economic slowdown and corporate earnings. A sharp selloff by foreign portfolio investors, amid rising US bond yields and a stronger US dollar, has also impacted investor sentiment. More importantly, trading volumes in the derivatives segment have decreased from their peak, following the introduction of stricter trading norms by the Securities and Exchange Board of India to cool off speculative activity, which had resulted in mounting retail losses.

  In January, the average daily trading volume (ADTV) for the F&O segment, at Rs 298 trillion, was 44 per cent below the peak ADTV of Rs 537 trillion in September, when markets reached record highs. This decline follows the introduction of new rules, such as one weekly expiry per exchange and higher extreme loss margins.

  Moreover, a new set of measures, including upfront premium collection and the removal of calendar spread benefits on expiry day, has become effective. Meanwhile, intraday monitoring of positions will begin on April 1, which is expected to further reduce volumes.