Will higher F&O STT, short term capital tax hit brokerages, stock exchange volumes? 

If Economic Survey 2024 was any cue, hikes in short-term capital gains tax and security transaction tax (STT) on futures and options were all likely. The two rates were indeed raised in Budget, along with long-term capital gains tax. While such moves are a market dampener, analysts are unsure whether they would actually lead to any sharp fall in investor activity, given the ongoing bull run in the market.       

"We do not expect any significant impact on the volumes based on past experience (in 2023 – STT was increased by 25 per cent but notional volumes had actually increased in 1QFY24), given that trading cost are not significant in options trading," said IIFL Securities. It sees neutral to marginal negative impact on markets, if at all due to rate hikes.

Sanjay Sinha, Founder of Citrus Advisors said the raising of STCG to 20 per cent and LTCG to 12.5 per cent is a body blow. In the light of all the concerns raised about the hyper active interest in the F&O segment, it is not surprising that the STT on F&O has been raised 5 times from 0.02 per cent to 0.1 per cent, he said as the analyst hoped the moves will moderate the frenzy in the F&O space now.

In a post Zerodha's Nithin Kamath said: "If the idea was to cool down the activity in the market, this might just do the trick." Kamath noted that Zerodha collected about Rs 1,500 crore of STT last year. "If the volumes don't drop, this will increase to about Rs 2500 crores at the new rates," he said. 

Despite the recent fall, the BSE Sensex and the NSE Nifty are up 11-12 per cent year-to-date. While the taxes would hurt equity returns, the inherent advantage of equity investments i.e. superior return profile, liquidity, inflation-hedge –flows are unlikely to be impacted, IIFL Securities said.

Two days ago, the Economic Survey warned of the possibility of overconfidence and felt expectation of even greater returns may lead to market speculation. India can ill-afford the economy's over-financialisation at its current development stage, the survey said saying investors' behavioral response to any steep correction would be that of 'feel cheated 'by unseen, more considerable, forces. They may not return to capital markets for a long time, it warned.  

"Equity markets were disappointed amid the hike in short-and long-term capital gains tax and removal of the  indexation benefit for property and gold. But with the top 100 active equity funds are sitting on 3.2 per cent cash, any correction  in the market is likely to see deployment of cash," Elara Securities said.