The government gave derivative traders, especially those that prefer options contracts, a reason to cheer on Friday as the manner in which the securities transaction tax (STT) is levied on such instruments was tweaked making it more attractive for market participants.
“I propose to give relief in levy of Securities Transaction Tax (STT) by restricting it only to the difference between settlement and strike price in case of exercise of options,” said Finance Minister Nirmala Sitharaman, while presenting her maiden Budget.
This assumes significance as rationalisation of STT was a long-standing demand of market participants, corroborated by the fact that it was a constant suggestion in successive wish lists that was submitted to the government every year ahead of the budget.
Currently, if an option contract is exercised, the trader has to pay STT of 0.125% of the settlement price. If the option is not exercised, then the STT is 0.05% of the premium.
Current norm
Currently, traders who exercised the options contracts had to pay a huge STT as typically the settlement value is significantly higher than the premium.
“The STT change is a big relief to options traders as the STT charge will no more be made on the value of the contract but on the difference between the strike price and the market price only,” said Rohit Srivastava, Fund Manager - PMS, Sharekhan.
Simply put, Friday’s announcement has brought down the STT on options contracts as earlier the levy took into account the value of the contract while now only the difference between the settlement price and the strike price would be factored in while calculating the STT.
“The easing of STT on options to the extent of difference between settlement and strike price will drive preference for options derivatives,” said Puneet Maheshwari, Director, Upstox, a discount broking firm.
While welcoming the change in STT structure, Vijay Bhushan, President, Association of National Exchanges Members of India (ANMI), the umbrella body of stock brokers, said that the government should also consider reintroduction of the erstwhile Section 88E that provided certain tax benefits in lieu of the STT paid.
