**Market Brief: STT Hikes & Revenue Shortfall (January 2026)** **Executive Summary** Zerodha co-founder Nithin Kamath has flagged a significant disconnect between government tax projections and actual market reality. His recent comments highlight that the steep Securities Transaction Tax (STT) hikes implemented in October 2024 are now visibly hurting both trading volumes and the government's own revenue targets. **The Trigger: October 2024 Tax Hike** The central government raised STT on futures from **0.0125%** to **0.02%** and on options from **0.0625%** to **0.1%**—an approximate **60%** increase. While the immediate impact was masked by a strong bull market in late 2024, the subsequent market cooling has exposed the structural damage to participation. **Impact on Volumes & Industry** Trading activity has contracted sharply as transaction costs heavily eat into trader margins. * **Volume Collapse:** Monthly options contracts plummeted from **397 million** in October 2024 to approximately **68 million** by early 2025. * **Brokerage Revenues:** Major discount brokers, including Zerodha, reported revenue drops of nearly **40%** for the quarter ending June 2025, marking a first-time "degrowth" in over a decade. * **Retail Exit:** High costs combined with regulatory tightening have forced a significant portion of retail liquidity out of the derivatives segment. **Revenue Reality Check (FY26)** Contrary to the government's expectation that higher rates would yield higher returns, collections are trailing estimates—a classic example of the Laffer curve effect. * **Target:** The Budget estimated FY26 STT collections at **₹78,000 crore**. * **Actuals:** Collections up to January 11, 2026, stand at roughly **₹45,000 crore**. * **Projected Shortfall:** Estimates suggest total FY26 receipts may reach only **₹57,000 crore**, a deficit of nearly **25%** against the target. **Market Sentiment** Kamath argues that the aggressive taxation has been counterproductive. By significantly raising the cost of entry and survival for traders, the tax base (turnover) has shrunk faster than the rate hike could compensate. With the Union Budget 2026 approaching, industry proponents are signaling that high transaction costs in a sideways market are unsustainable for liquidity, though expectations for an immediate rate reversal remain low.