Finance Minister Sitaraman will crack down on F&O transactions with the 2024 budget and raise STT. Stock prices plummeted

Finance Minister Nirmala Sitaraman proposed raising the securities exchange tax (STT) related to futures transactions and options transactions to 0.02% and 0.1%, respectively, in announcing the budget plan, to deal with the rise in speculative activity in the Indian financial market.

Stock prices plummeted as Nirmala Sitharaman strengthened taxes on stocks and derivatives transactions. In addition, short-term capital gains tax and long-term capital gains tax have also been raised. The Nifty 50 Index fell 1.8% to the lowest price of the day immediately after the Minister of Finance announced taxation. The index then partially recovered.

The tax rate for long-term capital gains in listed and unlisted universes will be uniformly 12.5%. It can be raised from the current 10%. The STT changes will be applied from 10/1, and the tax system changes for short-term capital gains and long-term capital gains will be applied starting today.

In recent months, the Ministry of Finance, the Reserve Bank of India, the Indian Securities and Exchange Commission, SEBI chairman Madhavi Puri Buch, etc. have issued warnings one after another, so the movement to raise STT, which is taxed on the transaction value of marketable securities, is a step towards suppressing derivative transactions by individual investors.

The National Stock Exchange (NSE) and the Indian Stock Exchange (BSE) are the top 2 in the world in terms of F&O transaction volume, and their trading volume reached a level where the trading volume of India's two stock exchanges combined during the month of April accounts for 80% or more of the world's transaction volume.

Economic Survey 2024, which was announced earlier this week, warned that speculative transactions such as derivatives are not suitable for countries with low per capita income such as India, and that individual investors may suffer considerable losses in F&O transactions.

Furthermore, derivative transactions are compared to gambling. “Derivatives trading has the potential to make huge profits. Thus, derivative transactions respond to human gambling instincts, and income can be increased if profits are made,” and investors are warned that “from a global perspective, derivative transactions almost always cause losses to investors.”

Earlier this month, Money Control reported that the SEBI Working Committee on F&O proposed measures to curb the rapid increase in derivatives trading volume. This includes raising the minimum lot size for derivative contracts from the current 5 rupees to 20 rupees, limiting the expiration date of weekly options to once a week for each stock exchange, and limiting the number of exercise prices for option contracts.

The government and regulators seem concerned about the spread of losses arising from the activation of futures and options transactions by individual investors who may not fully understand the risks and the nature of transactions.