New STT Rules Effective October 1: Important Updates For Futures and Options Traders

Futures and options (F&O) trading will become more expensive from 1 October 2024, due to revisions in the Securities Transaction Tax (STT). These changes were announced in the 2024 Union Budget by Finance Minister Nirmala Sitharaman to counter the increasing expansion of speculative derivatives trading.

What is the Securities Transaction Tax (STT)?

Securities Transaction Tax (STT) is levied on transactions involving securities like equity shares and derivatives, such as futures and options. The tax is collected by stock exchanges throughout the transaction process and paid to the government.

Key Changes to STT

Higher Tax on Options

The STT on option sales will increase from 0.0625 per cent to 0.1 per cent of the premium starting from 1 October. The STT will now be Rs 0.10 rather than Rs 0.0625, For example, if you sell an option with a premium of Rs 100.

Increase in Futures Tax

The STT on the sale of futures will rise from 0.0125 per cent to 0.02 per cent of the trade price. Selling a future contract worth Rs 1 lakh will incur a tax of Rs 20, up from Rs 12.50.

How Will This Impact Traders?

The rise in STT will make each transaction more costly, potentially discouraging frequent trading. This effect is particularly pronounced in the options segment, where premiums are already significantly high. According to CNBC, 89 per cent of regular traders in the F&O market lose money, frequently owing to over-leveraging or misjudging market circumstances. By increasing transaction charges, the government intends to encourage more disciplined trading.

Institutional investors, with larger financial reserves may feel the impact of these changes to a lesser degree but they will also face higher trading expenses for their F&O positions.

Why is the Government Raising STT?

Derivative markets have grown exponentially in recent years, currently accounting for a sizable share of trade volume on Indian exchanges. The increased STT rates are intended to reflect this rise ensuring that tax revenue keeps up with the rising value of these transactions.