Following the recommendations of the Economic Survey 2023–2024, the government on Tuesday announced an increase in the security transactions tax (STT) on futures and options trading in an effort to promote a more stable and developed investment environment.
During the presentation of the Union Budget 2024–2025, the Finance Minister revealed a few suggestions aimed at expanding the revenue base.
“First, the Finance Minister announced that the Security Transactions Tax on futures and options of securities is proposed to be increased to 0.02 per cent and 0.1 per cent,” adding that the receiver would be responsible for paying taxes on any revenue obtained from the buyback of shares.
The seller is responsible for paying the 0.0625 percent sales tax (STT) in the derivatives section.
The buyer must pay 0.125 percent of the option sale price when the option is exercised. The seller is responsible for paying the 0.0125 percent commission on futures sales.
On the other hand, the Finance Bill states that the increased rate will take effect on October 1.
The finance minister stated, “It is proposed to increase the rates of STT on the sale of a futures in securities from 0.0125 percent to 0.02 percent of the price at which such futures are traded, and on the sale of an option in securities from 0.0625 percent to 0.1 percent of the option premium.”
According to the Economic Survey, India’s financial sector must develop gradually and in an orderly manner.
“Derivatives are hedging tools, but investors all around the world mostly utilize them as speculative tools. It cautioned, saying that “India is probably not an exception” and that trading in derivatives may be extremely rewarding and satisfy people’s “gambling instincts.”
Retail investors using derivatives to participate in the capital markets may suffer losses more than average in the event of a large stock market drop.
The Union Budget, which prioritizes both growth and fiscal prudence, “sets a clear vision for India’s economic future,” according to Shripal Shah, MD and CEO of Kotak Securities.
“The increase in STT on futures and options is aimed at moderating currently heightened activity levels and fostering a more sustainable pace of growth in the stock market,” Shah stated.
“We anticipate a small period of adjustment as the market adapts to these new tax measures, but this will ultimately contribute to a sustainable investment landscape with balanced and orderly growth of the capital market,” Shah stated.
According to Dezerv co-founder Vaibhav Porwal, they urge investors to see past the short-term effects of the market and weigh the long-term advantages of a tax system that encourages patient investing.
Along with raising the short-term capital gains tax from the current 15% to 20%, the finance minister also raised the long-term capital gains tax from the current 10% to 12.5%. The aforementioned elevated tax rates are set to take effect immediately.
