Measures to clamp down futures and options (F&O) trading were expected in Budget 2024-25. Changing the classification of income from F&O trading from ‘Business income’ to ‘speculative income’, fixed tax rate of 30 per cent and TDS (tax deducted at source) made the rounds among traders.

However, what came in the announcement was an increase in the STT (Securities Transaction Tax) on F&O transactions. Tax on sale of futures in securities has been increased to 0.02 per cent on contract value, from 0.0125 per cent. In the case of options, where the tax is applied on the premium value and not contract value, STT on sale of options in securities has been increased to 0.1 per cent on premium, from 0.0625 per cent. The new rates will be effective from October 1, 2024.

Net impact

Here’s an example on how it ups the cost. A trader sells Nifty futures, say, at 24,500. As Nifty’s lot size is 25, the value of the contract will be ₹6,12,500 (24,500 multiplied by 25). STT is calculated on this value. Henceforth, traders have to pay ₹123 (₹6,12,500 multiplied 0.02 per cent) as STT compared to the earlier ₹77 (₹6,12,500 multiplied by 0.0125 per cent).

With respect to options, for instance, consider a trader selling a 25000-strike call option at a premium of ₹200. Here, the premium received will be ₹5,000 (₹200 multiplied by lot size of 25). The new STT charge will be ₹5 (₹5,000 multiplied by 0.1 per cent) whereas earlier it was ₹3.1 (₹5,000 multiplied by 0.0625 per cent).

The government seems to have found a way to extract more revenue without upsetting the markets much, at least according to the initial reaction. The benchmark index Nifty 50 was down 0.1 per cent on Tuesday.

Skyrocketing STT collections

According to the Annual Financial Statement of the Central government, the STT collections for financial year 2023-24 stood at ₹32,000 crore (as per revised estimate) compared to ₹11,528 crore in FY19. For FY25, STT is estimated to fetch ₹37,000 crore for the exchequer.

The volumes are growing at a strong rate and hit record levels last year. While there was a minor drop in volume of index futures in the last fiscal, there was an increase in activity in index options, stock futures and stock options. The expansion has been occurring in terms of both value and number of lots traded. The total number of contracts traded stood at 95 billion lots in FY24, representing a staggering increase from 5 billion lots in FY20. In terms of value, it ballooned to ₹800 trillion (2.75 times India’s GDP) in FY24, compared to ₹34 trillion in FY20.

Regulators such as SEBI and RBI have been noting the excessive increase in volumes that the futures and options (F&O) segment has been garnering in the recent years. To discourage investors from speculating in the F&O segment, rather than its original purpose of hedging, SEBI released a paper in January 2023 which showed that most of the investors lost money in derivatives trading.

According to the report, 9 out of 10 active traders incurred losses in FY22 with an average loss of ₹50,000. In addition to this, they paid 28 per cent of net trading losses as transaction cost. Even the profit makers paid transaction charges between 15 and 50 per cent of profits.

While the increase in STT raises the expenses for the derivative traders, will this be enough to discourage them from participating, is the question to be answered. Because, on an absolute basis, the increase appears only marginal on a per lot basis.