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Zerodha’s Nithin Kamath explains where share market traders lose even more money than trading

For a retail investor who is trading a derivative contract with say Rs 5 lakh in his account 10 times a day with a certain amount of leverage, just the STT component of the transaction makes it harder for him to be profitable at the end of the day.

Markets
Transaction costs eat up into the trading capital

Union Budget 2022 is just around the corner, and Zerodha co-founder Nithin Kamath is hoping for security transaction tax (STT) to be reduced this year. According to him, traders lose more money in transaction costs and impact costs than to the markets. “Every budget day for the last 15+ years, I’ve woken up hoping that STT is reduced. Zerodha customers alone pay Rs 2500 crores in STT, stamp duty, & GST annually. Overall, traders lose more money in transaction costs & impact costs than to the markets,” tweeted Nitin Kamath.

He further said, “Lower txn costs improve liquidity, hence decrease impact costs. But on the flip side, you could argue that people may speculate more, which isn’t good—one reason for Nudges on Kite. There needs to be a balance between both. Hoping STT reduces this year.” STT was introduced in 2004 when Long term capital gain tax (LTCG) was removed by the then finance minister PM Chidambaram. Since STT is collected upfront by the exchanges, it is so much easier for the government to collect than LTCG which requires investors to voluntarily declare and pay, Kamath stated.

Earlier, in the Union Budget 2018, LTCG of 10% for gains over Rs 1 lakh was introduced. However, STT wasn’t reduced. In response to a question of how STT impacts that market, Kamath explained how transaction costs eat up into the trading capital. Putting in perspective as to just how much traders lose, he said that if you add up STT, Stamp duty, & GST, Zerodha customers end up paying around Rs 200 crores a month or Rs 2500 crores a year in transaction taxes alone. This is aside from the income tax (10% for LTCG over Rs 1lk, 15% for STCG, and per income tax slabs for intraday & F&O) that has to be paid on any gains.

In an interview with ET Now earlier, Kamath had stated how for a retail investor who is trading a derivative contract with say Rs 5 lakh in his account 10 times a day with a certain amount of leverage, just the STT component of the transaction makes it harder for him to be profitable at the end of the day. “If the cost of transacting in India goes down further, it will only encourage more foreign participants to come into the country and trade on our exchanges, invest in our economy and the pie will grow overall. That is a change that has been long due and something happens around that,” Kamath had said.

Zerodha founder says, “Transaction costs eat up into the trading capital. If you add impact costs to this (money lost due to bid-ask spread), I think most active traders lose more money to transaction tax + Impact cost than to the markets.” He further explained how lesser transaction tax is definitely good for customers, not only directly but also indirectly since it increases liquidity and hence reduces the impact cost as well.

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