Whalesbook
STT's Double Whammy: Volumes Down, Revenue Short
The persistent increases in Securities Transaction Tax (STT) are casting a shadow over Indian equity markets, according to Zerodha co-founder Nithin Kamath. He argues that these hikes, particularly the significant 60% surge on Futures & Options (F&O) trades enacted in Budget 2024, are actively dampening trading volumes. While an initial bull run masked the effects, subdued market conditions over the past year have laid bare the fallout from increased transaction costs. This directly impacts market participants and the broader ecosystem, including brokers like Zerodha, which operates as a leading discount brokerage.
Government Revenue Falters Under STT Pressure
Kamath highlighted a critical revenue paradox: government projections for STT collections for FY 2025-26 were set at ₹78,000 crore, but actual collections as of January 11, 2026, stood at approximately ₹45,000 crore. Even with an estimated ₹12,000 crore by March 31, the total would fall short by nearly 25% of the target. Kamath suggests that higher STT rates may prove counterproductive, leading to reduced trading activity and, consequently, lower overall tax revenue than anticipated. This fiscal shortfall raises questions about the efficacy of sustained STT increases.
Historical Context and Evolving Tax Burden
The rationale for STT has shifted over time, adding to the complexity for market participants. Introduced in 2004, STT was initially meant to replace long-term capital gains (LTCG) tax when LTCG was zero. However, despite the reintroduction of LTCG in the Union Budget 2018, STT rates have continued to climb, increasing the cumulative tax burden on investors. The Budget 2024 saw STT rates rise to 0.02% from 0.0125% on futures and 0.1% from 0.0625% on options. This persistent rise in transaction taxes is a recurring concern for traders, who often hope for reductions with each new budget but see the opposite occur.
The Unprecedented Sunday Budget and Market Open
Adding an unusual dimension to the upcoming financial proceedings, the Union Budget 2026 is scheduled for presentation on Sunday, February 1. This marks the first time in over two decades that the budget will be presented on a weekend. In response, stock exchanges NSE and BSE have announced special, full-fledged trading sessions to accommodate the event, allowing for real-time market reaction to the announcements. This scenario echoes a similar event on February 28, 1999, underscoring the rarity of such market openings coinciding with budget presentations. The special session will allow traders to react instantly to fiscal policy shifts, a critical factor given the current debate around transaction tax impacts on market participation.