First introduced in 2004, STT is levied on transactions involving listed securities on stock exchanges and on units of equity mutual funds (MFs) being redeemed. It’s a part of the income tax earned by the Union government. In 2018-19, it formed around 2.4% of the income tax collected. In 2024-25 and 2025-26, it’s expected to form 4.4% and 5.4%, respectively.
If the government collects ₹78,000 crore in STT during 2025-26, it would mark a 577% jump from 2018-19. In the seven-year period up to 2018-19, the jump was 104%.
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What explains this? Simply put, in the last few years, the buying and selling of stocks, their derivatives (i.e., futures and options) and equity MFs has gone through the roof. From April 2024 to January 2025, the total number of trades in the cash market—where stocks are bought for delivery—at the National Stock Exchange (NSE) increased 187% compared to the entire 2018-19 period.
This would have helped, but doesn’t tell us the real story. In 2023-24, the NSE traded 95 billion derivatives contracts. In 2024-25, the exchange has already traded close to 100 billion contracts or 30 times more than in 2018-19. This is where the substantial jump in STT has come from.
So, how did we get here? In March 2020, the stock market plummeted once investors grasped the reality of the pandemic’s spread. Foreign institutional investors looked at it as an opportunity and in 2020-21 bought stocks worth ₹2.74 trillion or $37 billion. This pushed up stock prices and got many more retail investors buying stocks and equity MFs in the years that followed.
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Further, the Reserve Bank of India cut interest rates to push up economic growth. This sent retail investors in search of higher returns, and they hoped to earn those returns from the stock market. In this quest, they were helped by many new-age low-cost brokerages, which made it very easy to open demat and/or trading accounts using smartphones. Also, the brokerage fee charged on futures and options transactions was made very low or zero. These accounts had very good user interfaces in comparison with those of legacy brokerages, making trading very easy. They were helped by the fact that internet data charges had crashed.
Indeed, with the spread of the pandemic, work-from-home became the order of the day, allowing individuals to trade any time when the stock market was open, something that couldn’t have been so easy if they had been working from their offices.
In this mix came financial influencers, supposedly looking to sell courses on how to invest in stocks and their derivatives, but basically selling the idea that it was easy to make money by investing in stocks and their derivatives. Many influencers, who spoke in a crisp, clear and confident way, attained huge popularity among retail investors. In fact, what retail investors buying into this display of confidence didn’t know was that these finfluencers were being financed by stock brokerages through affiliate marketing programmes.
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All these factors came together and sent trading volumes soaring, particularly of derivatives, pushing up the STT collected by the government.
Now, just because buying and selling stocks and derivatives had become easier, it did not mean that making money had become easier too. Retail investors lost thousands of crores in the process. A report by the Securities and Exchange Board of India (Sebi) found that 90 out of 100 lost money trading derivatives.
So, Sebi has been trying to disincentivize people from trading in derivatives and has initiated several moves of late. This has had an impact on trading volumes. The number of derivatives contracts traded in January at the NSE was just 30% of the number traded in October. In February, the number is likely to be significantly lower than in January.
What does this tell us? Several factors can randomly come together and create a beneficial situation—or what we call luck. In this case, the government got lucky. But the price of that luck was paid by confident retail investors who did not realize their lack of understanding.
Many influencers, who spoke in a crisp, clear and confident way, attained huge popularity among retail investors.
Further, retail investors could turn their confidence into trades simply because of the convenience of technology, or to put it in a slightly sophisticated way, the so-called democratization of finance.
Of course, finfluencers cashed in on this and helped build that confidence. It led to a point where asset markets incentivized a certain kind of behaviour among people and institutions looking to profit from them, irrespective of whether it’s good for the world at large or not. Sebi now seems to be catching up with these finfluencers.
Finally, we must confront the question of how the government hopes to make ₹78,000 crore from STT in 2025-26, given that even cash market volumes have fallen slightly from their levels in the first six months of 2024-25. While the confidence of retail investor in derivatives has rightly come down, that of the government in its STT mop-up is still going strong.
The author is the author of ‘Bad Money’.