The National Stock Exchange (NSE) has raised concerns over the recent increase in Securities Transaction Tax (STT) on equity futures, warning that the move could inflate trading costs, weaken market liquidity, and negatively impact long-term investors. The exchange has urged the government to review the revised tax structure, particularly in the futures and options (F&O) segment.

According to NSE, equity futures are widely used by investors for hedging and risk management, not just for speculative trading. A higher tax burden on these instruments, the exchange noted, could discourage participation by genuine market users and reduce overall depth in the derivatives market.

Higher Costs May Deter Participation

NSE officials highlighted that the increased STT directly raises transaction expenses for traders and investors who depend on futures contracts to manage portfolio risk or maintain long-term positions. The exchange has formally communicated its concerns to the government, cautioning that sustained higher costs may gradually lead to lower volumes and reduced efficiency in price discovery.

While the government introduced the STT hike as part of a broader effort to curb excessive speculation in derivatives, NSE emphasised that a blanket increase could have unintended consequences for market stability and liquidity.

Illustration: Rising Costs for Bank Nifty Futures

To illustrate the impact, consider Bank Nifty trading at 52,000 with a lot size of 30 units. This results in a total contract value of approximately ₹15.6 lakh for a single futures lot.

Under the earlier STT rate of 0.02%, the tax payable per contract was around ₹312. With the revised rate raised to 0.05%, the STT payable increases to nearly ₹780 per lot—an additional cost of ₹468 on each transaction.

This represents a 150% increase in STT, significantly adding to the cost burden for active traders, high-frequency participants, and investors who regularly roll over futures positions. Over time, these cumulative costs could weigh on trading volumes and overall market liquidity.

Summary

The National Stock Exchange has asked the government to reconsider the recent hike in STT on equity futures, warning that higher transaction costs could reduce market participation, liquidity, and efficiency. While aimed at curbing speculation, the tax increase significantly raises costs for hedgers and long-term investors, potentially impacting derivatives trading volumes and market depth.

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