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Surge in Securities Transaction Tax
Context:
In 2018-19, the year before the COVID-19 pandemic, the Union government collected ₹11,528 crore through the Securities Transaction Tax (STT).
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- By 2024-25, this figure is projected to rise dramatically to ₹155,000 crore, with an estimated ₹178,000 crore in 2025-26.
- Introduced in 2004, STT is levied on transactions involving listed securities, including stocks and equity mutual fund (MF) redemptions, and forms part of the government’s income tax revenues.
- Its share in total income tax collection has increased from 2.4% in 2018-19 to an expected 4.4% in 2024-25 and 5.4% in 2025-26.
- This represents an astonishing 577% increase in STT collections over seven years, compared to just a 104% rise in the previous seven-year period.
Understanding the Growth in STT Revenue
- Stock Market: The rapid increase in STT revenue is primarily driven by the surge in stock market trading volumes, particularly in derivatives.
- Between April 2024 and January 2025, the total number of trades in the cash market of the National Stock Exchange (NSE) grew by 187% compared to the entire 2018-19 period.
- Derivatives: However, the real game-changer has been the explosion in derivatives trading.
- In 2023-24, the NSE traded 95 billion derivatives contracts, and by early 2024-25, this figure had already surpassed 100 billion—30 times more than in 2018-19.
How Did We Get Here?
- 2020 Market Crash: The roots of this unprecedented growth can be traced back to the market crash in March 2020, when investors fully grasped the severity of the pandemic.
- Opportunity for FII: Foreign institutional investors saw an opportunity and invested ₹12.74 trillion (approximately $37 billion) in Indian stocks during 2020-21.
- This influx of capital drove up stock prices, attracting retail investors to stocks and equity mutual funds.
- Interest Rate Cuts: The Reserve Bank of India (RBI) further fueled this trend by cutting interest rates to stimulate economic growth.
- Lower interest rates pushed retail investors to seek higher returns in the stock market.
- New Age: Simultaneously, the rise of new-age, low-cost brokerage platforms made it incredibly easy to open trading and demat accounts via smartphones.
- These platforms featured user-friendly interfaces, charged minimal or no brokerage fees for futures and options trading, and benefited from the significant reduction in internet data costs.
- WFH: Additionally, the shift to work-from-home during the pandemic allowed individuals to actively trade during market hours, a convenience that was previously limited for those working in offices.
- Finfluencers: Many of these influencers marketed investment courses but primarily sold the illusion that making money in stocks and derivatives was easy.
Hidden Costs of Market Euphoria
- While ease of trading increased, making money did not. Retail investors lost thousands of crores in the process.
- A study by the Securities and Exchange Board of India (SEBI) revealed that 90% of retail investors incurred losses in derivatives trading.
- Recognising this, SEBI has recently taken measures to discourage excessive derivatives trading.
- This has already impacted market volumes—derivatives contracts traded in January 2025 were only 30% of those traded in October 2024, and February’s numbers are expected to decline further.
Was It Just Luck for the Government?
- The government’s soaring STT revenues appear to be a stroke of luck driven by a convergence of factors—retail enthusiasm, easy access to trading platforms, low brokerage fees, and aggressive marketing by finfluencers.
- However, the financial losses suffered by retail investors highlight the risks of an overactive derivatives market.
- Now, with trading volumes declining, a key question arises: Can the government still achieve its ambitious ₹178,000 crore STT target for 2025-26?
- While retail confidence in derivatives trading has diminished, the government remains optimistic about its STT collections. Whether this confidence is well-founded or misplaced remains to be seen.
