Finance Minister Nirmala Sitharaman on Tuesday said the securities transaction tax (STT) will be increased on futures and options (F&O) trade from October 1 to discourage retail investors from investing in the risky instrument.
The measure was to allay concerns about hyperactive interest in the F&O segment.
"It is proposed to increase the rates of STT on the sale of an option in securities from 0.0625 per cent to 0.1 per cent of the option premium, and on sale of a futures in securities from 0.0125 per cent to 0.02 per cent of the price at which such futures are traded," she said while presenting the Union Budget for 2024-25.
The announcement led to benchmark indices Sensex and Nifty 50 tumbling 1.6 per cent and 1.77 per cent respectively in intra-day trade.
The increase in STT came a day after the Economic Survey flagged concerns over rising retail investors' interest in derivative trading.
The survey stated that speculative trade has no place in a developing country. It also pointed out that the sharp increase in retail investor participation in F&O trading is likely driven by humans' gambling instincts.
"Derivatives trading holds the potential for outsized gains. Thus, it caters to humans' gambling instincts and can augment income if profitable. These considerations are likely driving active retail participation in derivatives trading," according to the Economic Survey 2023-24.
Recently, Sebi chief Madhabi Puri Buch also cautioned investors against heavy bets on F&O. Before that, Sitharaman and chief economic adviser V Anantha Nageswaran flagged the growing risk of F&O trading for retail investors.
F&O trading continues to grow in popularity, and market experts believe that this is driven by the potential for profit and the rising trading volumes. Experts said investors who lack understanding or risk appetite should avoid derivatives trading.
The segment's popularity is evident from its massive growth, with the monthly turnover in the F&O segment reaching Rs 8,740 lakh crore in March 2024 compared to Rs 217 lakh crore in March 2019.
At the same time, the average daily turnover in the equity cash segment was Rs 1 lakh crore, while the F&O segment saw an average daily turnover of about Rs 330 lakh crore.
Futures and Options trading involves contracts that derive their value from an underlying asset, such as stocks or commodities.
Futures contracts obligate the buyer and seller to transact at a predetermined future date and price, while options give the holder the right, but not the obligation, to buy or sell the asset at a set price within a specific period.
These financial instruments are used for hedging risks, speculating on price movements, and arbitraging price differences. However, they come with significant risks, including leverage risk and market volatility, which can lead to substantial losses.
Experts said that the hike in SST on F&O could moderate the frenzy in this space as it will increase the cost of trading.
In light of all the concerns raised about the hyperactive interest in the F&O segment it is not surprising that the STT on F&O has been raised 5 times from 0.02 per cent to 0.1 per cent Sanjay Sinha, founder of Citrus Advisors, said.
"While STT has been increased on both Futures and Options from October 1 2024, this is the same date when exchange turnover charges will be reduced. In my view, the net impact of this will be largely net neutral for the customer. For example, STT on Options will increase by Rs 3.75 per Rs 10,000 round trip premium turnover while exchange turnover charges should reduce by approximately Rs 3.50 to Rs 4," Ashish Nanda, President and Head - Digital Business, Kotak Securities, said.
F&O trading is largely being utilised as a speculative tool for quick profits in the stock market. However, the reality is that most retail investors are losing money.
A study by the Securities and Exchange Board of India (Sebi) revealed that 89 per cent of individual traders in the equity F&O segment suffered losses, with average losses of Rs 1.1 lakh in FY22.
Additionally, there was an exponential increase in the F&O segment participation during the pandemic, with the total number of unique individual traders increasing by over 500 per cent from 7.1 lakh in FY19 to 45.24 lakh in FY21, the study noted.
Earlier, Buch stated that the capital markets regulator is "compelled" to warn against speculative bets in the F&O segment because it has become a "macro issue", affecting the broader economy now.
Household financial savings are going into the speculative bets, belying the expectations of being used for capital formation, and the youth is losing tonnes of money in such trades, she stated.
Vaibhav Porwal, co-founder, Dezerv, said the increase in STT will undoubtedly impact the profitability of frequent traders.
Shripal Shah, MD and CEO, Kotak Securities, said 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.
"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," he added.
Last month, the Sebi board approved stricter norms for the entry of individual stocks in the derivatives segment. The proposal was aimed at weeding out stocks with consistently low turnover from the F&O segment of the bourses.
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