Higher STT makes F&O trade expensive

New Delhi: Finance Minister Nirmala Sithraman on Tuesday proposed to increase the rate of securities transaction tax (STT) on futures and options (F&O) trade to discourage retail investors' participation in the risky instrument.

“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 in the Union Budget speech.

Further, buyback of shares will be taxed in the hands of shareholders similar to dividend from October 1, a move that will increase the tax burden on investors.

This came after the Economic Survey flagged concerns over rising retail investors’ interest in derivatives 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.