From October 1, 2024, the Securities Transaction Tax (STT) on Futures and Options (F&O) trading is set to increase. This change was announced by Finance Minister Nirmala Sitharaman in Budget 2024, aiming to control the rapid rise in speculation in the derivatives market. For traders and investors, it’s important to understand how these changes will affect your trades and overall strategy.
What is Securities Transaction Tax (STT)?
Securities Transaction Tax (STT) is a tax imposed on the purchase and sale of securities, including shares, futures, and options. Stock exchanges collect this tax at the time of the transaction, and it’s paid to the government. Now, with the new rules coming into effect from October 1, the STT rate for both options and futures is set to increase.
Key Changes in STT for F&O Trading
- Options Trading: The STT on selling options will rise from 0.0625% to 0.1% of the premium. For example, if you sell an option with a premium of Rs 100, the STT will now be Rs 0.10 instead of Rs 0.0625.
- Futures Trading: For futures contracts, the STT on sales will increase from 0.0125% to 0.02% of the transaction value. So, if you sell a futures contract worth Rs 1 lakh, the new STT will be Rs 20, up from Rs 12.50.
Impact on Traders and Investors
This STT increase will likely have a greater impact on retail traders who engage in high-frequency trades, especially those who trade on small margins. With each transaction becoming more costly, frequent traders in the options segment could face a significant rise in costs, where premiums are already high.
This change aims to curb excessive speculation in the derivatives market. According to SEBI, 89% of retail traders face losses in the F&O segment. The government hopes that by making trades more expensive, people will think more carefully before participating in speculative trading.
However, large institutional investors, who trade with larger funds and have long-term strategies, might not feel the pinch as much, although their overall trading costs in the F&O segment will still rise.
