Futures and Options (F&O) transactions may attract higher tax rate
By: Admin
June 21, 2024
Categories: Income Tax News|News
4 Min Read
The government is considering various options to discourage retail participation in the futures and options (F&O) segment. The proposed steps include moving F&O from the head of ‘business income’ to ‘speculative income’ and/or also introducing a tax-deductible-at-source (TDS) in the upcoming Budget, sources in the know said.
“The government and regulators have been worried for quite some time about the increased participation of retail investors in the derivatives market. There are fears that if markets correct, there could be significant losses to retail investors, leading to overall dampening of sentiments,” said the source.
Changing the head of F&O income from ‘business income’ to ‘speculative income’ will be a big step because it will be considered at par with lottery or crypto investments.
Income from F&O transactions is now taxed as business income. The income is added to business/salary income and taxed as per the applicable slabs of 5%, 20% and 30%, respectively. The added advantage of making it a part of business income is that the gains can be offset against any other loss. “As per the current practice, businessmen can offset the F&O profits with losses in other business and vice-versa,” said a lawyer.
However, if it is moved to ‘speculative income’, the losses can be offset against gains only from F&O trading, much like crypto currencies.
“As F&O trading is primarily speculative, the government wants to discourage retail investors as their investment decisions tend to get affected by informal sources rather than research,” said a lawyer.
Another tool that can be used and has been a favourite of the government in recent years is tax deducted at source (TDS). In the 2023-24 Budget, the government has introduced TDS on crypto currencies as well as liberalised remittance scheme (LRS).
On one hand, the TDS will help the government keep track of investors in the F&O market. Also, the fact that the amount paid as TDS can only be claimed while filing returns may serve as a deterrent. There are other options on the table as well. Tax experts believe a straight 30% tax – similar to crypto currencies – on F&O income could also be on the cards.
This comes at a time when the government, regulator, exchanges and fund houses have been ringing alarm bells over unabated rise in retail trading volume in the derivatives market.
Around a month ago, Finance Minister Nirmala Sitharaman had said, “Any unchecked explosion in retail trading in F&O can create future challenges not just for the markets, but for investor sentiment and also for household finances.”
The Finance Minister’s comments came as a warning bell for the market, as it was the first such comment from a senior government official regarding the derivatives trading.
On Tuesday, Reserve Bank of India Governor Shaktikanta Das also said that both RBI and the Securities and Exchange Board of India (Sebi) are monitoring the high volume of trading in the F&O segment. While ruling out any overheating in the financial market, he said that Sebi will take action, if necessary. He also added that the two regulators discussed the issue in the Financial Stability and Development Council (FSDC).
“Options and futures volumes are larger than nominal GDP of the country. We have discussed this matter with Sebi and they will deal with it,” Das said at an event.
While the increasing number of retail investors getting attracted towards the F&O market is not a problem in itself, a Sebi report has said that around 90% retail investors end up losing money in the derivatives market.
Source from: https://www.financialexpress.com/money/fampo-transactions-may-attract-higher-tax-rate-3529354/