The proposed higher Securities
Transaction Tax (STT) as introduced in the Union Budget, 2024, for futures and
options trades will be in effect from 1st October, 2024, with an aim to control
the rapid speculative growth in derivatives trading.
The
Revised Rates for STT will be as Follows:
For
Futures Trades: The STT will double from 0.0125 % to
0.02%.
For
Option Trades: The
STT will be increased from 0.0625% to 0.1%
What
is Securities Transaction Tax? (STT)
STT is a kind of tax relating to
financial transaction same as tax collected at source (TCS). STT is a direct
tax levied on each sale and purchase of securities which are listed on the
exchanges in India.
The tax is collected by the
exchanges and sent to the government.
What
is 'Securities'?
The term 'Securities' is not defined
by the STT law introduced in 2004.The 'securities' is defined in Securities
Contracts (Regulations) Act of 1956 which includes:
1. Shares, scripes, bonds,
debentures, debenture sticks etc.
2. Derivatives
3. Government securities of equity
nature.
4. Equity oriented mutual funds
5. Rights or interest in securities
6. Debt instruments.
All the above are traded on the
exchanges.
How
the Changes will Impact Futures and Options Traders?
Increased Trading
Costs:
No doubt, the hike
will increase the overall cost for traders in the F&O segment, making it
more expensive to trade futures and options. This could potentially discourage
small and retail investors, who might find these additional costs as an extra
burden.
As per the new change
the STT on selling options will be increased from 0.0625% to 0.1% of the
premium. If we sell an option with a premium of Rs.100 the STT will be Rs.10,
which was Rs.6.25 earlier.
In case of futures
selling the STT will be increased from 0 0125% to 0.02%. If we sell a futures
contract of Rs.10 lakh worth, the STT we have to pay now Rs.200 which is an
increase from Rs.25 earlier.
Shift in Trading
Volumes:
With increased
transaction costs, some traders may reduce their participation in F&O
trading, especially high-frequency traders who rely on smaller margins and
higher volumes. They will feel the heat most .This could affect market
liquidity.
Profitability of
Traders:
The higher STT will cut into the profits of
traders, particularly those making short-term trades or using strategies like
scalping that depend on frequent trades. The large institutional
traders feel the impact less as they have deep pockets and well thought out set
ups with a longer term view, they also have to carry the higher transaction
costs in F&O trading.
Long-term Market
Behavior:
The increase in STT may push traders to
reconsider their strategies, possibly shifting focus from speculative
short-term trading to long-term investments in cash markets or other segments.
As per recent research
by SEBI, more than 89% of retail traders are incurring losses in futures and
options trading taking unlimited leverages without any logical judgment.
The government wants
to curb these rapid destructive moves of the traders
To save the retail traders and to encourage them to trade more cautiously in the derivatives market the law makers increased the STT on F&O trades. At the same time they hope to divert them to the long-term investments in cash segments.
