On March 23, 2023, the Finance Minister of India, Nirmala Sitharaman, announced changes to the securities transaction tax (STT) applicable to options and futures contracts. The STT is a direct tax imposed by the central government on the buying and selling of securities like equities, futures, and options. The STT was introduced in the 2004 Budget via the Security Transaction Tax Act and is levied only on trades done through the stock exchange route.
The Finance Minister announced that the STT on the sale of options has been increased to Rs 2,100 on a turnover of Rs 1 crore. This represents a 23.5% increase from the previous applicable levy of Rs 1,700. The STT on the sale of futures contracts has been increased by 25%, which means that traders in the futures segment will now have to pay an STT of Rs 1,250 on a turnover of Rs 1 crore, compared to the earlier levy of Rs 1,000. These changes will come into effect from the new financial year 2023-24.
The changes proposed in the Finance Bill apply only to the derivative segment. Intraday trades are charged at 0.025% on the sell side, while delivery transactions are charged at 0.1% on both the buy and sell side.
The changes come amid a growing interest in futures and options (F&O) among retail traders. According to a recent study by the Securities and Exchange Board of India (SEBI), 9 out of 10 individual derivative traders end up losing their capital. The study found that the number of F&O traders on Dalal Street has increased over 500% in just three years, while 89% of individual derivative traders have lost capital, with an average loss of around Rs 1.1 lakh.
In addition to the hike in STT, option traders have been dealt another blow as the National Stock Exchange (NSE) has withdrawn the Do Not Exercise (DNE) facility for those trading in the options segment from March 30. The DNE facility allowed brokers to stop exercising option contracts on behalf of clients, preventing risks around physical settlement and allowing brokers to avoid exercising ‘close to money’ option strikes on behalf of clients. With the withdrawal of this facility, option traders will no longer have an auto square-off of positions, meaning that if a trader does not take delivery, it will not automatically get squared off, and the residual amount will have to be paid by the trader.
Overall, the changes announced by the Finance Minister are likely to have a significant impact on the derivatives market in India, particularly for individual traders who may find it more challenging to trade profitably with the higher STT rates and the withdrawal of the DNE facility.