Budget focuses on fostering stable & mature equity investment environment

New Delhi : In a bid to foster a more stable and mature investment environment, the government on Tuesday announced an increase in security transactions tax (STT) on futures and options trading, which is in line with the suggestions made by the Economic Survey 2023-2024.

Presenting the Union Budget 2024-2025, the Finance Minister announced a couple of proposals for deepening the tax base.

"First, Security Transactions Tax on futures and options of securities is proposed to be increased to 0.02 per cent and 0.1 per cent," said the finance minister while adding that income received on buy back of shares will be taxed in the hands of the recipient.

In the derivatives segment, STT on the sale of options is 0.0625 per cent, which is paid by the seller.

On the sale of options in which the option is exercised, it is 0.125 per cent which is payable by the buyer. On the sale of futures, it is 0.0125 per cent, which is payable by the seller.

However, the new rate will come into effect from October 1 as per the Finance Bill.

"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,” the finance minister said.

The Economic Survey said India needs to have an orderly and gradual evolution of the financial market.

"While derivatives are hedging instruments, they are mostly used as speculative instruments by investors worldwide. India is likely no exception," it warned, adding that derivatives trading holds the potential for outsized gains and caters to "humans' gambling instincts and can augment income if profitable".

A significant stock correction could see losses that are more considerable for retail investors participating in capital markets through derivatives.

According to Shripal Shah, MD and CEO, Kotak Securities, the Union Budget sets a clear vision for India's economic future, prioritizing both growth and fiscal responsibility.

"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," said Shah.

"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," Shah added.

Vaibhav Porwal, Co-founder, Dezerv, said they encourage investors to look beyond immediate market reactions and consider the long-term benefits of a tax structure that promotes patient capital.

The finance minister also increased the long-term capital gains tax from the current 10 per cent to 12.5 per cent while increasing the short-term capital gains tax from the current 15 per cent to 20 per cent. These increased tax rates will be implemented with immediate effect.