'If the idea was to cool down activity in markets...': Zerodha's Nithin Kamath on Nirmala Sitharaman's STT hike

In Nirmala Sitharaman's Budget this year, Security Transaction Tax (STT) on options has been increased from 0.062% to 0.1%, and on futures from 0.0125% to 0.02%, effective October 1st. Pointing to the new rates and Zerodha's data, co-founder Nithin Kamath in a post on X wrote they collected about ₹1,500 crore in STT last year. With the new rates, this figure could rise to around ₹2,500 crore if trading volumes remain consistent.

Kamath also noted the increase in long-term capital gains tax (LTCG) from 10% to 12.5% and short-term capital gains tax (STCG) from 15% to 20%, both effective immediately. "If the idea was to cool down the activity in the markets, this might just do the trick," he quipped.

The changes left retail investors with some heartburn. The hike in LTCG on all financial assets, including equity, and the increased STCG will significantly affect small traders. The only respite in Budget 2024 is the increase in the exemption limit for capital gains on financial assets from ₹1 lakh to ₹1.25 lakh.

The Finance Minister's strategy is seen as a move to regulate retail speculation in the F&O segment. Amar Ambani of YES Securities commented that, aside from the capital gains tax increase, the Union Budget was balanced and consistent in policy. He praised the fiscal deficit target of 4.9%, which helped domestic indices recover after an initial drop.

Vaibhav Porwal, co-founder of Dezerv, noted that the rise in STCG and LTCG taxes marks a significant shift. While the market's initial reaction may be bearish, Porwal believes these changes will ultimately foster a more stable and mature investment environment. He emphasized that the widening gap between STCG and LTCG rates encourages longer-term holdings, aligning with the goal of creating sustainable wealth. However, he acknowledged that the increased STT on F&O transactions will impact the profitability of frequent traders.