Introduction

The Modi government is likely to consider renaming prospects and choices exchanges from ‘business income’ to ‘speculative income’ and this renaming would put profit from these subsidiaries in the same assessment category as lottery rewards or cryptocurrency investments, which as of now pull in a level charge rate of 30

The government seems to be paying close attention to the increasing number of retail investors losing their money in futures and options (F&O) trading due to social media influencers promoting F&O trading and misleading them about potential profits. As per a recent report by the Financial Express, the Modi administration is contemplating changing the categorization of futures and options transactions from ‘business income’ to ‘academic income’.

F&O Taxation Policy Shift

The reclassification would mean that profits from these sources would be taxed at the same rate as lottery prizes or investments in cryptocurrency, which currently have a fixed tax rate of 30.

Still, it would mean that gains from futures and options( F&O) trading can only be neutralized against F&O losses and not losses from any other business income If the government implements this offer in the budget. The F&O trading community, especially retail dealers, has expressed dissatisfaction with this implicit change, saying that it could unfairly burden dealers. still, there are others who suppose similar measures could be salutary especially because over the last couple of times there has been a significant increase in academic retail participation in F&Os.

What will be the effect on dealers of an indirect increase in taxes on F&O transactions? 

The suggested rise in taxes on F&O transactions could greatly affect traders and the trading field. Currently, F&O transactions are considered as business revenue, enabling traders to offset profits with other business losses. Commenting on this change, Sakshi Jain, CA, stated that reclassifying these transactions as capital revenue with a fixed 30% tax rate would not only raise the income tax burden but also limit the offsetting of losses with other capital assets like cryptocurrencies. 

The government's goal is to reduce retail involvement in the growing F&O market, as many investors enter without proper research for fast profits, she explained. Jain stated that the government aims to encourage more knowledgeable investment decisions by assessing an increased duty rate.

India's STT(Security Transition Tax) Hikes and Market Impact

The most recent increase in STT for options contracts in India was from 0.05 to 0.0625. The hikes took effect on April 1. Currently, the Securities Transaction Tax (STT) rate is 0.1 for buying and selling of equity shares. For intraday equity, the sell side fee is 0.025. The sell side of equity futures has a rate of 0.0125. 

For selling equity options, the fee is set at 0.0625, while exercising incurs a fee of 0.125. SEBI's capital requests controller has been warning stakeholders that the majority of traders lose money in F&O, so increasing STT could raise transaction costs and maintain trading volumes at a reasonable level. 

STT was first implemented in 2004. It is imposed on transactions that involve various types of securities. All transactions related to stocks that include equity or equity derivatives, such as F&O, are subject to STT, as are mutual fund transactions. 

The national government anticipates gathering ₹ 27,625 crore from STT in the fiscal year 2024, representing a 10.5% increase compared to the revised budget estimate of the previous fiscal year. It will account for approximately 1.5% of the total expected direct tax collection of ₹18.24 lakh crore.

In general, although the conclusion of this offer is expected to attract retail investors and ensure price stability, it will be important to also focus on keeping a lively and liquid derivatives market.