STT on F&O: Breaking down cost impact per contract on Index futures and options

STT on the sale of an option in securities has been hiked from 0.0625 percent to 0.1 percent of the option premium.

The Budget proposal to hike securities transaction tax on derivatives trades has got market participants worked up. The consternation is understandable, as STT has to be paid irrespective of whether the trade results in a profit or loss. A higher STT means the breakeven threshold for a derivatives trade has increased.

STT on the sale of an option in securities has been raised from 0.0625 percent to 0.1 percent of the option premium, and on the sale of futures in securities from 0.0125 percent to 0.02 percent of the price at which such futures are traded.

We decode the cost impact of this rise in STT on index futures and some Nifty 50 stock index options.

Calculations show that the STT on the sale of one lot of Nifty Futures is approximately Rs 77 at the old rates. With the revised STT, this would be Rs 123, an increase of Rs 46. For Bank Nifty futures, the net increase in cost impact is Rs 57.

Futures of the Sensex, Finnifty, and Midcap Nifty indexes, which had approximate STT costs of Rs 100, 72, and 77 per lot on sale, will now have new STT charges of Rs 160, 115, and 123, respectively.

Also read: Hike in STT on F&O trades a dampener, impact to be felt with a lag, say traders

The table below shows the new STT charges across index and Nifty 50 stock futures and the potential cost impact:

Sheersham Gupta, Director and senior technical analyst at Rupeezy says the hike will have varying effects on these trades. "Notably, the sale of futures contracts will experience a significant increase in STT, with an average rise of Rs 40-60 for index and stock futures. This could shift trader behaviour towards more positional trading and reduce intraday and scalping activities,” he said.

“In contrast, the STT hike has a minimal impact on options trading since it is levied on the option premium, making it less likely to deter options traders,” he added.

Gupta, however, notes that the overall impact on market liquidity remains to be seen once the revised STT kicks in from October 1.

The regulatory measure comes into effect after SEBI's study showed a growing loss of wealth among retail participants in F&O trading. According to the study, nine out of ten individual traders in the equity derivatives segment incurred losses in FY22, up from 87 percent in FY19.

Another study released by SEBI today on July 24 shows that more than 70 percent (7 out of 10) of individual intraday traders in equity cash segment have incurred losses in FY 2022-23. The study also noted the surge of over 300 percent in the number of individuals participating in intraday trading in equity cash segment in FY 2022-23 compared to FY 2018-19.

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