Budget 2024: Traders Reel Under Capital Gains Tax Shock; Will Zerodha, Groww Take A Hit?

SUMMARY

The announcement of increase in short-term and long-term capital gains tax as well as securities transaction tax is expected to slow down retail trading activity

Digital brokerages such as Zerodha, Groww and Angel One’s revenues are likely to slide as derivatives, intraday traders constituted a large part of their respective businesses

Short-term investors such as derivative traders could now look to invest in long-term investment asset classes such as mutual funds that will attract comparatively low taxes

Even as markets regulator Securities Exchange Board of India (SEBI) had indicated earlier this month that it was concerned about the rapid growth in India’s derivatives trading market, no one anticipated the big changes for short-term and long-term capital gains that the finance ministry would come down hard on the futures & options trading and securities markets in India in the Union Budget 2024.

Earlier today, finance minister Nirmala Sitharaman hiked the short term and long term capital gains tax on financial and non-financial assets.

The LTCG has been hiked from 10% to 12.5% whereas the STCG tax on some assets will be 20% now. Further, the securities transaction tax (STT) has hiked from 0.062% to 0.1% on options trading and from 0.0125% to 0.02% on futures trade.

These announcements did not jolt the stock markets heavily, but analysts reckon there may be a dramatic turn in the coming weeks as investor sentiments have certainly been impacted by the changes.

Sonam Srivastava, CEO and founder of investment research firm Wright Research, said that the announcements have sent some shockwaves in the derivatives markets, particularly among short-term traders who look to book profits regularly. Srivastava claimed this will have a ripple effect on the trading volumes on NSE and BSE since there was a huge surge of futures and options (F&O), intra-day traders after the pandemic, which contributed to the trading turnover.

As per the latest SEBI’s monthly bulletin, the equity derivatives volumes of the two bourses saw a whopping 71% YoY growth to INR 9,504 Lakh Cr in May 2024.

Srivastava added that there is also a likelihood of short term investors like derivative traders now looking to invest in long-term investment tools as mutual funds which will attract comparatively less taxes.

Online discount broking platform Angel One’s senior vice president Aamar Deo Singh told Inc42 that the budget sprang a surprise in the form of hiking LTCG, STCG & STT on derivatives. ”While LTCG would have an impact on the long-term investors, STCG would primarily impact the trader community. Hiking the STT on derivatives will lead to higher transaction charges for the derivatives traders and it will be interesting to see how that impacts the overall volumes on the exchanges.”

Will Zerodha, Groww Face The Heat?

While F&O and intra-day traders will now have to shell out more taxes, this group of investors also contributed to the revenue and user growth (more than 80%) for discount broking such as Zerodha, Groww and Angel One.

Brokerage fees from active retail traders (flat fees for each F&O trade and intraday order and equity delivery) has been one of the major sources of profits for brokers such as Zerodha, Groww and Angel One, particularly as the number of active retail traders has grown exponentially in the past year.

Zerodha’s operating revenue grew 37% to INR 6,832 Cr in FY23 from INR 4,977 Cr in the previous year. Fees and commission charges accounted for 84% of the revenue at INR 5,727.2 Cr.

Groww’s operating revenue more than tripled to INR 1,277.8 Cr in FY23 from INR 351 Cr in the previous fiscal year. At 95.9%, a majority of its revenue came from subscriptions and commissions fees in FY23.

For Angel One, broking fees constituted 65% of its overall revenue in Q1, FY25 which increased marginally QoQ to INR 1,405 Cr.

Inc42 reached out to Groww, Upstox for comments on how the tax changes impact revenue. Our article will be updated as and when these startups respond.

However, Zerodha cofounder and CEO Nikhil Kamath tweeted earlier in the day that the hike on STT would have up to 66% impact on tax collections. Zerodha collected INR 1,500 Cr through STT from its users last year, and if trading volumes don’t drop, Kamath expects this to go up to INR 2500 Cr annually, from October.

Though Kamath did not elaborate on how the increase in various taxes for an active retail trader will affect the trading activity on Zerodha or decline in user base, analysts we spoke to said that discount brokerages have seen a huge bump from the surge in F&O, intra-day trading.

“Zerodha contributes 20% to the retail trading volumes of stock exchanges in India. Groww’s active user base was more than 11 Mn in June. If the idea of the budget was to slow down the momentum of retail trading activity, then not only the stock exchanges, but also the broking companies which have the highest market shares will get hit,” a Bengaluru-based wealth management executive told Inc42 on the condition of anonymity.

[Edited By Nikhil Subramaniam]