Finance Minister Nirmala Sitharaman will present the first Union Budget of Prime Minister Narendra Modi's third term on July 23, 2024. This budget is expected to propose tax changes, including potential changes to tax on Futures and Options (F&O) trading.
Lately, the RBI (Reserve Bank of India) and SEBI (Securities and Exchange Board of India) have been observing an influx of retail investors in the F&O space. Market experts are anticipating higher taxes to curb this trend.
Proposed Tax on F&O Trading
Capital market participants have suggested raising the Securities Transaction Tax (STT) on algo-based hedge funds that conduct High-Frequency Trading (HFT). The suggestion is to levy a higher STT on investors with F&O turnover of over Rs 1,000 crore. STT is a tax on the transaction value of traded securities. Algo-based hedge funds use advanced algorithms to execute orders at high speeds, often outpacing retail traders, creating an uneven playing field and potential disadvantages for retail investors, leading to heavier losses. So, the objective of recommended changes in STT is to protect retail investors from significant losses in Futures & Options trading.
Treatment of F&O Income
There is also speculation that the upcoming Union Budget may announce changes in the tax treatment of income from futures and options (F&O) trading. Currently, F&O income is taxed as business income, but the government could consider reclassifying it as speculative income. This would align it with lottery or crypto investments. Additionally, a tax-deductible-at-source (TDS) may be introduced for F&O transactions.
Heightened Retail Activity in F&O
The Indian Futures & Options (F&O) market has witnessed a significant increase in retail participants in recent years. This is evident from the rise seen in monthly F&O segment turnover, from Rs 217 lakh crore in March 2019 to Rs 8,740 lakh crore in March 2024.
The government and regulators have been highlighting the widespread losses that retailers tend to incur in F&O trading. As per a SEBI report, 9 out of 10 individual traders incurred an average loss of Rs 1.1 lakh in FY22. There is also a general fear that any major markets correction could lead to significant losses for retail investors, and this could dampen investor sentiments.
The expected tax changes could have the dual benefit of protecting retailers against major financial losses while also tempering speculative trading in the derivatives market. If the government reclassifies F&O income and possibly increases STT, it may be able to create a more stable and fair-trading environment, ensuring long-term investor confidence and market stability. If you are considering trading in F&O, you can explore the new-age tools and state-of-the-art platform offered by Sharekhan.
