However, market participants argue that derivatives are not just speculative instruments. They are also used for hedging, price discovery and liquidity support for the cash market.
What will it cost for one batch of Nifty futures after an STT hike?
As of close on Sunday, the Nifty is around 24,825. The lot size for Nifty futures is 65 units. This means that one futures contract represents a face value of approximately Rs 16.13 lakh. Securities transaction tax on futures is levied on this full turnover value, not on margins or profits.
Before the budget, the STT rate on futures was 0.02%. For one batch of Nifty futures, this worked out to around Rs 325 per trade. After the Budget, the STT rate was increased to 0.05%. This increases the tax on the same transaction to around Rs 817 per lot. Simply put, each round of trading in a single Nifty futures contract now costs almost Rs 500 more in STT alone.
Traders often think in index points rather than rupees, so the impact becomes clearer when translated into points. Earlier, an STT of Rs 325 meant a trader would need about five points in the Nifty to recoup the tax cost alone.
Post the rise, an STT of around Rs 817 means the index needs to move around 12 to 13 points to break even on this one charge. This calculation excludes brokerage fees, exchange fees, GST and other regulatory costs, which further increase the breakeven threshold.
Analysts say this jump in breakeven points is especially important for short-term traders who rely on small price movements. Strategies that previously made sense and had tight margins now require bigger steps to remain viable. For many traders, this changes the risk-reward balance of each trade.
What are the costs for options trading
Options trading has also become more expensive, although the mechanisms are different. For options, the STT is charged on the premium value instead of the full contract value. If we consider that a Nifty call option is trading at a premium of Rs 100. With a lot size of 65, the total premium value of the contract is Rs 6,500.Earlier, the STT on the option premium was 0.10%, which meant a tax of Rs 6.50 per lot. Post-Budget, the STT rate has been increased to 0.15%, increasing the tax on the same transaction to Rs 9.75. While the absolute rise in the rupee appears small, it represents a 50% jump in STT. For traders who trade multiple lots or make frequent trades, this increases compounding quickly over time.
The main problem with STT is that it is a fixed cost in one direction. You will be charged regardless of whether the transaction is profitable or not. This makes even small rate increases meaningful, especially for high-frequency traders, arbitrage strategies, and intraday participants operating on small margins.
Industry participants have expressed concerns that higher transaction costs could reduce market liquidity rather than just curb speculation. Jimeet Modi of the SAMCO Group has argued that increasing trade friction at a time when India is competing for global capital sends the wrong message. According to him, derivatives markets are crucial liquidity engines and risk transfer mechanisms that support the broader stock market.
There are also concerns about foreign participation. Foreign portfolio investors have already moved money out of Indian equities due to global risk sentiment and higher yields on US bonds. Higher transaction taxes further reduce after-tax returns, making India less attractive to derivatives-based strategies used by global funds.
Pranav Haridasan of Axis Securities has wondered whether a higher STT will achieve the stated target. He has pointed out that futures are already margin-based and risk-managed products, suggesting the tax could ultimately hurt liquidity and participation more than excessive retail speculation.
(Disclaimer: Recommendations, suggestions, views and opinions expressed by the experts are their own. These do not represent the views of the Economic Times)
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