'Speculation becomes costlier and...': Zerodha co-founder Nithin Kamath decodes the Budget fine print

Zerodha co-founder Nithin Kamath says Budget 2024 will make speculation "much more expensive" and long-term investments less attractive due to changes in the securities transaction tax (STT). 

"The STT charged on options has been increased from 0.0625% to 0.1% of the option premium. The STT charged on futures has been increased from 0.0125% to 0.02% on the price of futures. This makes trading futures and options costlier now," Kamath wrote in the Economic Times. 

Originally meant to allow institutional investors to hedge investments, futures and options have become a speculative tool for many retail investors. With these changes, Kamath writes, "speculation will soon become much more expensive."

Rajesh Baheti, MD, Crosseas Capital Services, says F&O volumes, overall, are likely to be hit as the STT hike will increase trading costs for high-frequency traders who generate volumes on the bourses, reducing their return on investments. 

The new STT rates mean that the cost of trading in select equity derivative transactions is set to increase by 60%. Specifically, the STT on the sale of options has been raised from 0.0625% to 0.1% of the option premium value, and on the sale of futures, from 0.0125% to 0.02% of the futures price. This translates to an increase from ₹62.5 to ₹100 per lakh on the premium value for options and from ₹12.5 to ₹20 per lakh for futures. These changes will take effect from October 1.

Shripal Shah, CEO of Kotak Securities, believes that the increase in STT is aimed at moderating the heightened activity levels and fostering a more sustainable pace of growth in the stock market. He points out, “The average daily notional turnover in equity derivatives has surged more than 40 times to ₹381 lakh crore in June 2024 from ₹8.79 lakh crore in May 2018. The STT increase, coupled with expected stricter measures from SEBI, is likely to affect overall volumes in the coming months.”

Despite the higher costs of speculation and the minor increase in capital gains taxes, Kamath sees a silver lining for entrepreneurs. He highlights the budget's significant support for small businesses, improved access to capital, and focus on education and skill development. Most notably, investing in startups has become more attractive. Kamath notes, "Earlier, private investments in startups attracted capital gains of 20%. This has now come down to 12.5%, in line with investing in listed securities." Additionally, the removal of the 'angel tax' on startup investments is a major relief. "The tax was introduced as a way to stop people from setting up shell businesses to launder money. Unfortunately, it ended up hurting startups because to tax authorities, the high valuations of startups made them hard to distinguish from shell companies."