STT @ Rs 78,000 crore: Is govt expecting massive buoyancy in the markets in FY26?

Jimeet Modi is the Founder & CEO of Samco Securities

Finance Minister (FM) Nirmala Sitharaman aims to earn big revenues from the stock market taxes. She has set an ambitious target of earning revenues to the tune of Rs 78,000 crore from Securities Transaction Tax (STT) for the financial year 2026. Is this target achievable or will it remain ambitious at the end of the year? Let’s examine.

The high hopes of the FM to collect a sizeable revenue from STT rests on the past performance of this revenue stream, where the tax (STT) collected has always surpassed the Budget Estimates (BE). In FY19, against the BE of Rs 11,000 crore, the government collected Rs 11,528 crore in STT, in FY20 against BE of Rs 12,800 crore it collected STT of Rs 12,374 crore (despite Covid), in FY21 against BE of Rs 13,000 crore it garnered Rs 16,927 crore STT, in FY22 against BE of Rs 12,500 crore it mopped up STT of Rs 23,191 crore, in FY23 against BE of Rs 20,000 crore it collected STT of Rs 24,960 crore, in FY24 against BE of Rs 27,625, it collected STT of Rs 34,381 crore.

However, the hike in the STT rates announced in the full budget presented by the FM in July 2024 has played a crucial role in slowing down revenues from STT. From October, the STT on sell of Futures was hiked from 0.0125 percent to 0.0200 percent and on Options it was hiked from 0.0624 to 0.1000 percent.

In FY 25, against BE of Rs 37,000 crore and the Revised Estimate (RE) of Rs 55,000 crore, till January 12, 2025, the actual collection of STT has been only Rs 44,538 crore. This indicates a slowdown in the STT revenues.

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This slowdown in revenue also follows the harsh measures announced by the capital market regulator Securities and Exchange Board of India (SEBI) in October 2024 and implemented in a phased manner since November 2024.

From November 20, 2024, new measures on weekly expiries, larger contract sizes, and enhanced protection against tail risks through the imposition of additional Extreme Loss Margin (ELM) have been introduced.

SEBI has discontinued Weekly expiries in the Futures and Options (F&O) segment from November 2024. These smaller contracts were attracting more participants and contributed a lion's share in the overall F&O turnover. In addition to this, SEBI also doubled the contract size from November 2024, taking the cost of trading in the F&O segment to the next level.

As a result of these measures, the overall turnover in the F&O segment have taken a hit of more than 30 percent. The hike in STT rates is likely to add fuel to the fire in declining STT revenue going forward, as some more stringent SEBI measures are yet to take effect from February 2025 onwards, which may further dampen the F&O participation and hence, the STT revenue.

The SEBI guidelines on upfront collection of Option premium and removal of calendar spread treatment on expiry day are coming into effect from February 1, 2025. Intraday monitoring of position limits at least 4 times a day, too will come into effect from April 1, 2025, making the risk management robust and impacting the trading volume in the end.

In this backdrop, the FM has set up a target of collecting Rs 78,000 crore of STT, which is 110 percent higher than the BE FY26 over BE FY25 and growth of 41.8 percent of BE FY26 over RE FY25. The target of Rs 78,000 crore of STT collection also seems ambitious as the government assumes Nominal GDP growth of 10.1 percent for FY26.

Based on the above set of arguments one can only assume that either the Government has chewed more than it can bite or it seems to be assuming massive buoyancy in markets.!!!