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How The Government Hike In Securities Transaction Tax Will Impact F&O Trading

This translates into a hike of 23.5% on sale of options and on sale of futures contracts.

<div class="paragraphs"><p>Stock price movement on screen. (Photo: Rawpixel/Freepik)</p></div>
Stock price movement on screen. (Photo: Rawpixel/Freepik)

The Securities Transaction Tax on the sale of options has been hiked, in keeping with the amendments made to Finance Bill, 2023, passed in the Lok Sabha on Friday.

On the sale of options, the STT has been increased to Rs 6,250 on a turnover of Rs 1 crore, compared to the earlier applicable levy of Rs 5,000.

This translates into a hike of 25% on sale of options contracts.

On the options side, the STT is charged on premium, not strike price.

On the sale of futures, STT has been hiked to Rs 1,250 on a turnover of Rs 1 crore against an earlier levy of Rs 1,000. This indicates a 25% hike.

Higher STT Will Impact Yields On Arbitrage Strategies

According to Chandan Taparia, head of technical and derivatives research at Motilal Oswal Financial Services Ltd., this is because the quantum of 23.5% is fairly high.

However, traders who are using strategies to make large gains may still continue with options. Volumes of options may not necessarily come off rapidly, he said.

STT Expected To Have A Short-term Impact On Option Volumes

Gaurav Bissa, vice president at InCred Capital Financial Services Pvt., said the STT hike will have a short-term impact on option volumes as market participants will take some time to reassess their strategies.

"This hike will impact intraday option writers more as they will see an increased cost in their strategies. This will also impact traders who use multiple legs in option strategies. However, the percentage of such traders is relatively small. Hence, the impact is likely to be limited in terms of options volumes," he said.

Yet, the STT hike is unlikely to have a material impact on traders who deploy positional strategies with the aim of capturing higher option premiums, according to him.

The government had expected to collect Rs 20,000 crore from STT in FY23, which is 60% higher than the budget estimate for the preceding fiscal.

The government had introduced STT in 2004 for transactions on different types of securities. All stock market transactions that involve equity or equity derivatives like futures and options are liable to be taxed under STT.

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