New Delhi [India], February 2 : A day after Budget announcement, Union Finance Minister Nirmala Sitharaman said on Monday the hike in Securities Transaction Tax (STT) on futures and options (F&O) was to discourage investors from getting into speculative trading.
She said many parents had called up and apprised that their children were investing and losing money in F&O trading. "F&O is a highly speculative market," she asserted.
The finance minister told reporters that the increase in STT on F&O was categorically to discourage speculation in derivatives trade.
Citing a SEBI report, she said that 90 per cent of people who invest in F&O lose their money. "People are losing money due to high speculation in F&O trading," she added.
A study conducted by the Securities and Exchange Board of India (SEBI) earlier revealed that approximately 93 per cent of individual traders in the equity futures and options (F&O) segment continue to incur significant losses. Despite consecutive years of losses, more than 75 per cent of loss-making traders continued trading in F&O.
F&O, which stands for Futures and Options, refers to financial derivatives that allow traders to speculate on asset price movements without owning the asset itself. The underlying asset can be stocks, bonds, commodities, currencies, indices, exchange rates, or interest rates.
Securities Transaction Tax is a small levy charged by the government on every buy or sell transaction in the stock market, including shares, futures, and options. While it may appear modest, STT directly increases trading costs, particularly for frequent traders, hedgers, and arbitrageurs.
The government proposed raising the STT on Futures to 0.05 per cent from the current 0.02 per cent. STT on options premium and exercise of options are both proposed to be raised to 0.15 per cent from the present rate of 0.1 per cent and 0.125 per cent, respectively.
Notably, STT has been raised only on options and futures, and not on other asset classes. Other STT rates remain the same.
The Government gave the rationale that the total volume of options and futures transactions is more than 500 times the Indian GDP. Therefore, the government believed there was justification for raising rates to curb purely speculative activity in options and futures.
As retail investors are increasingly incurring losses in equity index derivatives (F&O) trade, SEBI and the government have been, from time to time, putting in place measures to strengthen the derivatives framework, including raising minimum contract size, to disincentivise such trades.
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