STT Changes on F&O – How will the recent amendments affect Indian traders?

Although Futures and Options trading is not new to Indian markets, there has been a noticeable increase in interest in recent years. F&O traders must have a thorough understanding of the stock markets, particularly the trading fees. The STT is one of the most common fees paid by traders, and recent changes made by Finance Minister Mrs. Nirmala Sitharaman are expected to increase its cost. Here are the specifics of these modifications and how they will affect the typical trader.

What is Securities Transaction Tax (STT)

Let's start with the fundamental definition of STT. In India, the Securities Transaction Tax (STT) was first implemented in 2004 with the intention of taxing stock market investors' profits. It is a tax imposed on the acquisition or disposal of securities, such as shares, derivatives, and equity-oriented mutual funds, listed on the Indian stock exchanges. The applicable rate of STT depends on the nature of the transaction or the type of security traded.

For instance, STT is charged at 0.100% on the purchase of an equity share in a company (where such contract is settled by the actual delivery or transfer of such share or unit) while STT is charged at 0.010% on futures.

What recent modifications to STT for F&O has the government proposed?

According to the most recent changes made on March 24, 2023, the Finance Minister increased the STT levy on the sale of options by 25% through an amendment to the Finance Bill. STT on the sale of options has increased as a result, going from the current Rs. 5,000 on a turnover of Rs. 1,00,00,000 to Rs. 6,250 under the current tax regime. STT is assessed against the option premium sum rather than the strike price. STT on the Futures is also increased from the current 0.010 to 0.0125%. The STT will increase, and it will take effect from April 1st, 2023.

What effects will it have on the typical F&O trader?

The direct impact of the increase in STT will be the increase in the cost of trading for the average trader. The volumes of F&O trading are expected to be significantly impacted by this, according to many industry experts, because it will be very difficult for retail traders to turn a profit. Retail traders will need to make more profitable trades as a result of the increased fees in order to maintain the overall profitability of their trading portfolio. Many experts agree that Algo traders, high-frequency traders (HFT), and foreign portfolio investors (FPIs) will be primarily affected by this change. It will make trading more expensive for them and less appealing as a result.

What are the industry reactions to the changes proposed?

Nikhil Kamath, a co-founder of Zerodha, commented on the proposed increase in the STT after it was announced. He said that a steep increase in the STT, which is a direct tax, combined with other costs like Exchange fees, Stamp duty, GST, brokerage fees, and Sebi charges would make it difficult for the average trader to make a profit. Due to the narrow spread in which High-frequency traders (HFTs) trade, Mr. Rajesh Gandhi, partner at Deloitte Haskins and Sells LLP, told Reuters that he believes the increase in the STT will have a significant negative impact on HFTs. Axis Securities' Mr. Rajesh Palviya, VP head of derivatives and technical, also stated that the impact will be significant for automated traders who enter and exit the market. While there could be some impact on the volume of trading by foreign investors, overall market volumes may not be impacted, said Shyam Sekhar, founder of iThought, a SEBI-registered investment advisory firm.

Few Benefits-

As futures lose some of their appeals, traders are likely to switch to options. The trading loss in options is only the premium, whereas futures are riskier and have the potential to deplete all trading capital. According to SEBI, the percentage of individual traders in futures has already been falling, from 43% in FY19 to 11% in FY22.

The increase in STT may help the stock market regulator in its efforts to discourage individual investors from investing in the futures market. High-frequency automated trades would be another market segment that would be negatively impacted by this change. Because these trades are generated by machines and executed quickly, the margins are extremely thin and the rise in transaction costs may hurt them.

However, since these trades tend to crowd out legitimate investors and overburden the trading system with orders, a slight decrease in HFT may be beneficial for the market.

Important questions-

1. What is the revised STT on Options?

The revised STT on options is 0.0625% or Rs. 6,250 on a turnover of Rs. 1,00,00,000.

2. What is the revised STT on futures?

The revised STT on Futures is 0.0125% effective from 1st April 2023.

3. How will STT on futures or options be calculated?

STT on F&O trading is applied to the selling price of the lots accounting for the total securities of the lot. For example, consider Trader X bought 10 lots of Stock A for Rs. 5000 and sold the same for 5100 and the lot size is 100 per lot, STT will be calculated as below. STT = 0.0125% * 5100 * 10 * 100 Therefore, STT = Rs. 637.5

4. Can STT be claimed as a deduction in computing capital gains tax?

No STT cannot be claimed as a deduction while computing capital gains tax.

Conclusion-

A significant announcement, like the modification to the STT for F&O, should ideally be made in the Budget itself rather than as an amendment. The announcement of another amendment to the long-term capital gains taxation that eliminates indexation, however, has shaken the stock markets. Increased STT on F&O trading will primarily affect F&O traders, but large players like HTPs and FPIs will bear the brunt of this amendment.