The Modi government is likely to impose a higher income tax on futures and options (F&O) trading. The derivatives trading activity may see tax treatment akin to income from lottery or cryptocurrencies in the Union Budget, said reports. Income from F&O transactions could be reclassified from 'business income' to 'speculative income' with likelihood of imposition of a TDS on such income.
Amid such speculations, a 30% tax, similar to crypto investments, on F&O income is also a possibility, which could adversely affect the market sentiment.
However, analysts at Kotak Institutional Equities (KIE) are of the opinion that that these measures will potentially curb accessibility for low-ticket retail (largely option buyers).
According to a KIE report, options trading has a high skew, given that 20 percent of retail option traders likely drive 90 percent of premiums. "Hence, an increase in the lot size when combined with fewer weekly expiries could be a feasible solution," the brokerage believes.
Here’s a look at what analysts said on the prospects of the government taking steps to curb high risk trading in F&O transactions.
Nishit Master, Portfolio Manager, Axis Securities PMS said, “Indian markets have the highest volumes for options contracts globally, where many speculative trades occur. The government and the market regulator are aware of the risks involved and have taken and continue to take measures to curb risk, especially for retail investors, and maintain market stability. These steps, including higher margin requirements and/or larger lot sizes, among others, are welcome and will contribute to the market's long-term health.”
Trivesh D, COO, Tradejini said, “There should be a restriction as a measure for societal benefit -to protect small income groups from incurring big losses. 80% of F&O participants contribute a meagre 2% of options turnover. If the trader has a high net worth, then he/she should be allowed to trade.”
Shrey Jain Founder and CEO SAS Online - India’s Deep Discount Broker said, “Futures and options (Derivatives) trading adds depth to the stock market. There is a robust mechanism to monitor excesses at exchange level. In the overall interest of the market participants, the mechanism needs to be reviewed and updated wherever necessary. However, there is no need to introduce new taxes or tax deducted at source on derivative transactions. Such a move will be detrimental to the trading sentiment in particular and stock market in general.”
Narendra Solanki, Head Fundamental Research - Investment Services, Anand Rathi Shares and Stock Brokers said, “I think SEBI as a regulator wants to protect small retail investors from high risks and volatile nature of derivatives markets where the possibility of complete loss of capital is also there if done without any expert advice or strategy.”
Manish Chowdhury, Head of Research, StoxBox said, “We do not anticipate higher margins for F&O trading as we believe that the recent raft of new contract launches by both the BSE and NSE, post approval by the regulator, indicate intention to enhance market participation. Also, our sense is that any move to tighten the system could prove counter-productive as it would signal uncertainty in decision-making at the apex level.”
Apurva Sheth, Head of Market Perspectives & Research, SAMCO Securities said, “Any steps taken in the interest of market and to protect the retail investors’ interest is and should be welcomed. Higher margins for option contracts will deter small investors with limited capital from trading in options segment. Other measures like having a minimum net-worth criteria to activate the F&O Segment could be explored. One must understand that the regulator can only ensure that markets are fair and efficient. The onus is on retail investor to educate himself before trading in a high-risk derivatives segment. If you decide to walk with a blindfold on a highway, then nobody can help you.”
Nitasha Shankar, Head Equity Strategy, Yes Securities India said, “Trading in F&O comes with its own risk and therefore it is important for participants to understand these risks rather than just chasing rewards. Any move to regulate or ensure this will always be a welcome step.”