
Security transaction tax collection: The rising star in income tax revenue kitty

Summary
- Higher STT rates on derivatives trading boosted tax collections, however, recent regulatory curbs threaten this revenue stream as F&O market turnover declines.
The government's tax revenue landscape is undergoing significant changes, with income tax collections emerging as a crucial component. Despite implementing tax cuts in the latest Budget, the Centre estimates a robust 14.4% growth in income tax collections in 2025-26, thanks to an unexpected boost from Securities Transaction Tax (STT) revenues.
This outlook stems from a strategic policy shift implemented in the previous budget, where the Centre increased STT rates across different trading segments. Specifically, the rate for options trading was raised from 0.0625% to 0.1%. Futures trading saw an increase from 0.0125% to 0.02% in 2024-25 amid growing worries over excessive speculation and risks associated with traders making losses in the futures and options market.
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The hike led to a sharp increase in the government’s tax collections in 2024-25 with STT mop-up witnessing a threefold increase since 2021-22, and their contribution to overall income tax collections jumping from 3.3% to 5.4% during the same period. This surge has provided the government with a solid financial cushion, effectively offsetting potential revenue losses from other tax cuts. Without the significant increase in STT collections, the budgeted income tax growth in 2025-26 would be one percentage point lower.
However, this revenue head faces significant challenges. Recent regulatory measures aimed at controlling derivatives trading have begun to show their impact. The futures and options market has experienced a substantial decline in trading volume, dropping from a peak of ₹9.3 trillion in June 2024 to ₹6.3 trillion by December 2024—raising concerns about the long-term viability of STT as a major source of government revenue.
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Despite the recent challenges, STT collections are expected to remain a crucial support for government tax revenue in 2025-26, providing a temporary buffer while other revenue streams stabilize.
While stricter regulations help protect investors and reduce market speculation, they potentially threaten a revenue stream that has become increasingly important for the government's fiscal health, highlighting the need to maintain both a regulatory watch and a fiscal prudence.
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