FM Sitharaman cracks down on F&O trading in Budget 2024, raises STT; also tightens capital gains tax regime

The Street is betting that increased social sector spending and new welfare schemes could boost rural consumption, benefiting FMCG companies.

Finance Minister Nirmala Sitharaman during her Budget 2024 sought to curb the incessantly rising futures & options (F&O) trading in India by proposing to hike the securities transaction tax (STT) on Futures & Options trading.

The STT on sale of equity options will now be levied at 0.1 percent of the option premium, up from 0.0625 percent; and at the rate of 0.02 percent on sale of futures as against 0.0125 percent now.

Stocks plunged as Nirmala Sitharaman raised taxes on equity and derivatives trading. She also increased short-term capital gains and long-term capital gains taxes. The Nifty 50 index fell as much as 1.8 percent at the day’s low, shortly after the Finance Minister announced the levies. The index partially recovered shortly thereafter.

Long-term capital gains across listed and unlisted universe will now be taxed at a uniform rate of 12.5 percent. This is an increase from 10 percent at present. The STT changes will be applicable from 1 October, while the Short Term Capital Gains and Long Term Capital Gains tax changes will be applicable effective today.

The move to raise STT, which is levied on the value of securities traded, is a step towards curbing derivatives trading by retail investors after a series of warnings from the finance ministry, the Reserve Bank of India, the Securities and Exchange Board of India, SEBI chairperson Madhabi Puri Buch, and others over the past few months.

The National Stock Exchange (NSE) and BSE are the world’s top two bourses in terms of F&O volume and the turnover has reached such levels that the combined turnover of the two Indian stock exchanges accounted for more than 80 percent of the global turnover in the month of April.

The Economic Survey 2024 released earlier this week said that such speculative trading as derivatives has no place in a low per capita income country like India, warning that retail investors may face considerable losses in F&O trading.

Further, it compared derivatives trading to gambling. “Derivatives trading holds the potential for outsized gains. Thus, it caters to humans' gambling instincts and can augment income if profitable,” it said, warning investors that “Globally, derivatives trading loses money for the investors, for the most part.”

Earlier this month, Moneycontrol reported that a SEBI working committee on F&O has proposed measures to curb the rapid growth in derivatives volume. These include increasing the minimum lot size of derivative contracts to Rs 20 lakh-Rs 30 lakh from the current Rs 5 lakh, restricting weekly options to one expiry per stock exchange per week, and limiting the number of strike prices for options contracts.

The government and regulators seem to be worried about widespread losses arising from heightened trading in futures and options by retail investors, who may not fully understand the risks or the nature of such trading.