Trading derivatives also known as futures & option (F&O) contracts on the stock exchanges is likely to get expensive starting April as the government has raised securities transaction tax (STT) on trading F&O contracts according to the amendments proposed to the Finance Bill 2023 which was passed by the Lok Sabha on Friday.
As per the amendments to the Finance Bill, Futures and Options (F&O) trading in India’s stock and commodity market will now attract higher taxes from April 2023. STT on the sale of options has been hiked to Rs 6,250 on a turnover of Rs 1 crore against an earlier applicable levy of Rs 5,000.
On the sale of futures contracts, the STT has been hiked to Rs 1,250 on Rs 1 crore of turnover against the earlier levy of Rs 1,000. In percentage terms, the government has hiked the securities transaction tax (STT) by 25 per cent on the sale of options and 25 per cent on the sale of futures contracts.
“STT hike will impact intraday options writers more owing to the increased cost. This hike will mostly impact the volumes churned by High-Frequency Traders (HFT). More than 90 per cent of volume in Indian Market originates from scalpers, arbitrage houses and HFT firms. Rise in STT on F&O trading is going to further dent the morale of high-frequency F&O traders that will in turn have a negative impact on F&O trade volume, thereby increasing the spread for retail investors,” says Arvinder Singh Nanda, senior vice president at Master Capital Services.
The hike in STT is likely to impact high frequency traders and option sellers in a major way as it comes after NSE announced that it will scrap 'do not exercise' (DNE) facility with the beginning of April F&O expiry.
"The increase in STT will specially impact high frequency traders (HFTs). Any change in the cost structure has a material impact due to the thin spread in which HFTs operate," Rajesh Gandhi, partner, Deloitte Haskins and Sells LLP told Reuters.
Moreover, foreign portfolio investors do not get a deduction for STT while computing capital gains on derivatives, Gandhi said.
"DNE is related to stock options where delivery of stocks is possible. A buyer of a call or a put option has the right to buy, but with the implementation of DNE, the right to buy will go away if he does not square off his position and the option expires in-the-money; he will have to compulsorily take delivery of the shares," says Virendra Singh Rathore, Senior Research Analyst (Derivative Desk) at Prudent Stock Broking.
"For example, suppose a person purchases a Reliance call option with a strike price of Rs. 2,300 at Rs. 20, and Reliance closes at Rs. 2,300.50 on expiry day. Without DNA, his position would have squared off at Rs. 0.50 per share in cash settlement. If the option buyer does not square off the option with DNE implementation. He has to take delivery of Reliance shares with DNE implementation. He will be required to pay Rs 5,75,000 i.e. (2,300*250) in order to take delivery of the stock," Rathore explains.