STT Hike May Backfire, Push Traders Further Into Options: Zerodha’s Nithin Kamath
The government is expected to collect ₹73,700 crore through Securities Transaction Tax (STT) in FY27, according to a PTI report. In the current financial year, STT collections are estimated at ₹63,670 crore, lower than the earlier projection of ₹78,000 crore.
However, the recent STT hike announced in the Union Budget may not achieve its intended objective of curbing speculative activity in the derivatives market. Nithin Kamath, founder and CEO of Zerodha, has warned that higher transaction taxes could instead push traders deeper into options trading, which is inherently more speculative.
Why the STT hike could be counterproductive
In a post on social media platform X on February 2, a day after the Budget presentation, Kamath questioned the effectiveness of increasing STT to reduce speculation in futures and options (F&O). He argued that the tax structure disproportionately impacts futures, making options relatively more attractive.
“I don’t know the exact reasoning behind the increase in STT. But if the goal was to reduce speculative activity in F&O, I’m not sure this will do anything,” Kamath said.
Details of the STT increase
During her Budget speech, Finance Minister Nirmala Sitharaman announced a sharp increase in STT rates:
Futures contracts: Raised to 0.05% from 0.02%
Options premium: Increased to 0.15% from 0.1%
Exercise of options: Hiked to 0.125%
The announcement triggered a negative market reaction, with benchmark indices Sensex and Nifty 50 falling over 2.5% intraday.
Options already dominate derivatives trading
Kamath pointed out that nearly 95% of India’s derivatives trading volume is concentrated in options. Citing earlier analysis, he noted that STT on futures is levied on the entire contract value, while options are taxed mainly on the premium amount.
This structural difference means that any STT hike makes futures trading less viable, potentially driving even more traders toward options.
According to a study by Securities and Exchange Board of India, about 92% of retail investors lose money in derivatives trading, underscoring the risks involved.
Concerns over uncertainty and trading volumes
Kamath also flagged concerns over frequent and incremental STT hikes, saying they create uncertainty for traders and brokers.
“At some point, transaction costs make trading unviable. You’re already seeing that impact in futures trading,” he said, warning that sustained hikes could lead to a material drop in volumes.
Call for alternative reforms
Instead of repeatedly raising transaction taxes, Kamath suggested product suitability norms as a more effective way to protect retail investors. Such norms would define who is eligible to trade complex derivatives products.
Calling it an “unpopular opinion,” Kamath said this approach would be preferable to what he described as a “death by a thousand STT hikes.”
He has previously argued that encouraging participation in cash equities and futures—through lower STT and higher intraday leverage—could help balance market activity rather than attempting to suppress options trading.
0 Comments