Futures and options trading is not new in the Indian markets, however, they have definitely gained a renewed interest in recent years. F&O traders need to have a deep understanding of the stock markets and primarily the charges associated with trading. One of the top charges incurred by traders is the STT and the recent changes in the same by Finance Minister Mrs. Nirmala Sitharaman are set to make it steeper. Given here are the details of these changes and how they will impact the average trader.
Read More: Securities Transaction Tax (STT) – All you need to know
What is STT?
Let us begin with the basic meaning of STT. Securities Transaction Tax (STT) was introduced in India in 2004 and is aimed at taxing profits made by investors in the stock markets. It is a tax that is levied on the purchase or sale of securities listed on the Indian stock exchanges, including shares, derivatives, and equity-oriented mutual funds. STT is calculated in terms of percentage over and above the transaction value thereby increasing the ultimate cost for the buyer. The applicable rate of STT depends on the nature of the transaction or the type of security traded, for example, STT levied on the purchase of an equity share in a company (where such contract is settled by the actual delivery or transfer of such share or unit) is 0.100% while STT on futures is levied at 0.010%.
What are the latest changes in STT for F&O proposed by the Government?
As per the latest changes announced on 24th march 2023, the Finance Minister through the Finance Bill amendment 2023 has increased the levy of STT on the sale of options by 25%. This has resulted in STT on the sale of options rising from the current Rs. 5,000 on turnover of Rs. 1,00,00,000 to Rs. 6,250 in the current tax regime. STT is charged on the premium amount and not on the strike price. STT is also increased on the futures from the existing 0.010 to 0.0125%. The increase in the STT will be applicable from 1st April 2023.
Three was an earlier confusion as the reports from the government mentioned an increase in STT on options by 25% translating into an increase from 0.017% to 0.021%. However, the prevailing rate of STT on options was already increased to 0.050% effective from 1st June 2016. The government admitted to the typographical error and cleared the confusion asserting the applicable rate to be 0.0625% effective from 1st April 2023.
How will it impact the average F&O trader?
The direct impact of the increase in STT will be the increase in the cost of trading for the average trader. Many experts from the industry believe that this will significantly impact the volumes in F&O trading as it will be quite expensive for retail traders to make sufficient profits. Given the increased charges, retail traders will have to rely on more profitable trades to ensure the overall profitability of their trading portfolio. Many experts are also of the view that the impact will be felt majorly by the algo traders, High-Frequency Traders (HFT), and FPIs (Foreign Portfolio Investors). It will increase their cost of trading and will no longer make it as attractive.
What are the industry reactions to the changes proposed?
After the proposed increase in the STT was announced, Zerodha co-founder Nikhil Kamath mentioned that such a steep rise in STT which is in the nature of a direct tax along with other expenses like exchange charges, stamp duty, GST, brokerage, and Sebi charges will result in further lowering the morale of the average trader as they will find it hard to be profitable. Mr. Rajesh Gandhi, partner at Deloitte Haskins and Sells LLP told Reuters, is of the opinion that the increase in the STT will impact the HFTs gravely due to the thin spread in which HFTs operate. Mr.Rajesh Palviya, VP head of derivatives and technical), Axis Securities also mentioned that the impact will be high on the automated traders who enter and exit trades rapidly to make quick money.
On the other hand, there are also countering views that state the impact on the retail traders will be minimal as 90% of volume in Indian Markets originates from Scalpers, Arbitrage houses, and HFT firms. Therefore, the increased STT will eat into their margins as well as for FPIs due to the fact that STT is not a deductible expense in computing capital gains.
The rise in STT was coupled with the announcement of withdrawing the DNE (Do Not Exercise) facility for those trading in the options segment from March 30. This facility allowed the option traders to auto-square off their trading positions as brokers were allowed to stop exercising option contracts on behalf of clients. Although this announcement is applicable only for stock option traders and not index options traders, the double jeopardy of the same will affect the retail participation and thereby the volumes in the F&O segments.
Conclusion
A major announcement like the change in the STT for F&O should have been ideally introduced in the Budget itself and not as an amendment. However, the news has shaken the stock markets followed by news of another amendment in the long-term capital gains taxation eliminating indexation. F&O traders will have to face the brunt of increased STT on F&O trading but the greater burden of this amendment will be on the big players like HTPs and FPIs.
FAQs
The revised STT on options is 0.0625% or Rs. 6,250 on a turnover of Rs. 1,00,00,000.
The revised STT on Futures is 0.0125% effective from 1st April 2023.
STT on F&O trading is applied to the selling price of the lots accounting for the total securities of the lot. For example, consider Trader X bought 10 lots of Stock A for Rs. 5000 and sold the same for 5100 and the lot size is 100 per lot, STT will be calculated as below.
STT = 0.0125% * 5100 * 10 * 100
Therefore, STT = Rs. 637.5
No STT cannot be claimed as a deduction while computing capital gains tax.
