The STT debate: Is India’s STT fuelling a derivatives frenzy or investor losses?

The panel highlighted that tetail investors lost Rs 75,000 crore last year in the F&O segment

The current Securities Transaction Tax (STT) structure requires to be scrutinised and recalibrated as it is distorting equity market behaviour, penalising spot trades while fuelling speculative frenzy in derivatives, said market veterans in an exclusive panel discussion with Moneycontrol.

Experts flagged the sharp divergence in STT rates—10 basis points on both buy and sell in cash, adding up to 20 bps per round trip versus of just 1 bps on options turnover when shorted and 12.5 bps on intrinsic value if exercised—as a key reason behind the surging shift towards structured options strategies.

“Retail investors lost Rs 75,000 crore last year in the F&O segment. Of that, Rs 26,000 crore was lost in transaction costs, wherein 15 percent accounted just in STT, a sunk cost with no winner,” said Mayank Bansal, a UAE-based hedge fund manager. “This is dead loss. Sunk Cost.” He said, cash segment STT is “punitive.” and drives directional traders into options.”

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According to Sebi study, individuals spent Rs 26,000 per person as a transaction cost in FY24. Nearly 71% of transaction cost was in the form of brokerage and exchange fee, 15 percent was in STT, and 14 percent in GST and stamp duty.

Typically, in the cash segment, STT is charged at 0.1% on both the buy and sell sides when investors take delivery of shares, effectively amounting to a 20 basis points round-trip cost on the entire transaction value. Even in intraday trades, where shares are squared off within the same day, STT is levied at 0.025% on the sell side, calculated on the full trade value.

In contrast, the options market enjoys a much lighter tax burden. For shorting options, the STT is just 0.1% of the premium. Meanwhile, for options that are bought and exercised, STT applies at 0.125% of only the intrinsic value, and that too only if the contract is exercised at expiry. If the option expires worthless or is squared off before expiry, no STT is paid by the buyer at all.

India’s derivatives turnover now dwarf cash market activity, with a ratio of 200 to 1, although it is down from peak volumes experience in June last year.

Despite the ill-aligned STT structure that penalises cash market transactions, Mrugank Paranjpe, managing partner at MCQ and former MD & CEO of MCX, warned against increasing STT on options on grounds that it would choke liquidity. “Transaction taxes create friction. Higher STT widens bid-ask spreads and hits market efficiency,” he said. He called for a reduction in the STT rate for cash market transactions instead.

PPFAS CIO Rajeev Thakkar called for recalibrating STT across cash, futures and options segments. “Today’s skew encourages speculation and hurts long-term investing. Structural balance is needed,” he said, adding that lower-income retail investors speculating in complex derivatives should not be encouraged.

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