Budget 2024: STT Hike On F&O To Hurt Traders, But Retailers Won't Be The Worst Hit

In the Union budget 2024–25, Finance Minister Nirmala Sitharaman announced an increase in securities transaction tax on futures to 0.02% from 0.01% and 0.1% from 0.062% on options.

This translates to a tax paid of Rs 10,000 for each crore, based on an options contract's premium value, and Rs 2,000 per crore for the sale of futures contracts.

The hike is 60% higher in the case of derivative contracts, compared to the earlier tax of Rs 6,250 per crore on options contracts based on premium values and Rs 1,250 per crore on futures contracts.

While the hike, in relative terms, is substantial, its impact scales up as the value of the underlying contracts rises.

The average trade size over the last six months ended in May stood at Rs 6,194 for equity options, implying an average tax paid going up to Rs 6.1 from Rs 3.8 earlier.

As per a study conducted by the Securities and Exchange Board of India, 9 out of 10 individual traders in the equity derivatives segment incurred losses in FY22, which had risen from 87% in FY19.

The average returns made by individual traders stood at over Rs 82,000, while the returns made by those who lost money were over Rs 1.1 lakh in the year.

Active traders, excluding outliers, spent an additional 28% of net trading losses in the form of transaction costs.

"Even those making net trading profits incurred between 15% and 50% of such profits as transaction costs," according to the study.

While the retail segment is the most notable bearer of losses in the markets' derivatives segment, the share in participation highlights a different category of traders as the drivers of derivatives volume.

The National Stock Exchange of India remained the largest derivatives market in the world for the fifth year in a row in 2023, according to the World Federation of Exchanges, with nearly three out of every four contracts traded in the world taking place on the NSE.

Individual participants, or retailers, held the second-highest share of participation in equity derivatives so far in FY25 at 25.8%, as per the NSE's Market Pulse report for June, which considers data up to the end of May.

This is surpassed by prop traders, who command a majority share of participation at 59%.

Trends in the share of different modes of trading used to participate in equity derivatives also highlight the over 61% share of the co-location method, which is primarily used by proprietary traders.

Mobile-based trading's share stood at 17.5%, while internet-based trades made up for 8.1% of trades in the equity derivatives segment so far this fiscal.