Futures and Options (F&O) trading in India’s stock and commodity market will now attract higher taxes from April 2023. The government has hiked the securities transaction tax (STT) by 23.52 per cent on the sale of options and 25 per cent on the sale of futures contracts.

The move will mainly impact the volumes churn by High-Frequency Traders (HFT), i.e. the high-octane automated machines. More than 95 per cent of India’s equity market volume is concentrated in derivatives, and in that, majority of the churn is driven by HFT machines.

Finance Bill amendments

As per amendments to the Finance Bill 2023, STT on the sale of options has been hiked to ₹2,100 on a turnover of ₹1 crore against an earlier applicable levy of ₹1,700. On the sale of futures contracts, the STT has been hiked to ₹1,250 on ₹1 crore of turnover against the earlier levy of ₹1,000. On the options side, the STT is charged on premium and not the strike price.  

“Income from trading in derivatives is deemed to be capital gain for FPIs. Considering the fact that STT is not a deductible expense for computing capital gains income, this move shall increase the cost of operations of HFT foreign portfolio investors (FPIs) in India,” Suresh Swamy, Partner, PW & CO LLP. 

Exception

Usually, such a key proposal has been announced in the budget, but this time was an exception, as the government chose to bring this hike as an amendment to the Finance Bill. 

The government estimated to collect more than ₹20,000 crore in STT from the stock markets by the end of March 2023, which was 60 per cent higher than the previous year. But the hike in taxes now could give the government a windfall.

As per this year’s budget documents, the actual collections from STT were at ₹16,927 crore in 2020-21. In India, STT was introduced in 2004, for transactions in different types of securities. All stock market transactions that involve equity or equity derivatives like F&O are liable to be taxed under STT.

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