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Transaction tax raised tenfold for physical delivery of derivatives in F&O segment

However, the tax department issued a clarification that the settlement of derivative contracts by taking delivery of shares will not be different from the procedure followed for equity contracts.

August 29, 2018 / 12:19 PM IST

The tax incidence on the settlement of derivative contracts by taking physical delivery of securities is set to increase tenfold when compared to those who settle in cash. The Bombay High Court was apprised by the Central Bureau of Direct Taxes (CBDT) that physical settlement in the equity and derivatives segments will attract the same securities transaction tax.

The delivery of shares worth Rs 1 crore will now be taxed Rs 10,000 as opposed to Rs 1,000 previously.

According to a BloombergQuint report, two-member bench comprising of Justice MS Karnik and BR Gavai had sought an explanation from the taxman following a petition filed by members of the National Stock Exchange (NSE). The ambiguity over the tax liability on securities transactions came to the fore after the exchange moved 46 stocks in the futures and options segment to the compulsory delivery category.

This change was made applicable since July. The market regulator also passed an order whereby equity derivatives were ordered to shift to physical settlement in a staggered manner.

The prevailing rate in the derivatives segment will be the benchmark in collecting tax from clients. Members of the exchange will be liable to pay the differential in case the taxman makes an upward revision of the rate.

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However, the tax department issued a clarification that the settlement of derivative contracts by taking delivery of shares will not be different from the procedure followed for equity contracts.

 

 

 
TransactionSTT Rate (in %)Payable by
Purchase of share settled through delivery0.1Purchaser
Sale of share settled through delivery0.1Seller
Intra-day trades settled in cash0.25Seller
Sale of an option0.05Seller – on the option of premium
Sale of an option, where option is exercised0.125Purchaser – on the settlement price
Sale of a futures0.01Seller – on the traded price

Source: NSE

 

Most investors close out their positions before the expiry of the contract instead of taking delivery of securities. In the derivatives segment, the total value of physically settled securities was Rs 240 crore for the month of June. The daily turnover was Rs 10 lakh crore for the period under consideration.

The contracts for August expire on August 30, the last Thursday of the month.
Moneycontrol News
first published: Aug 29, 2018 10:07 am

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