Government Considers Higher Tax on F&O Income Amid Concerns Over Retail Participation in Derivatives Market
The Indian government is reportedly contemplating a significant adjustment to the tax treatment of income from futures and options (F&O) transactions. According to a report by Financial Express, the proposal suggests reclassifying F&O income from ‘business income’ to ‘speculative income,’ akin to the treatment of lottery winnings and cryptocurrency gains. This move is aimed at curbing hyperactive retail trading in the derivatives market and enhancing regulatory oversight.
Current Tax Treatment and Proposed Changes
Presently, income from F&O transactions is categorized as business income and taxed according to the standard income tax slabs of 5%, 20%, and 30%. This classification allows taxpayers to offset gains from F&O against losses incurred in other business activities. However, under the proposed changes, F&O income may face a flat 30% tax rate, similar to the tax regime for cryptocurrencies.
Additionally, the government is considering imposing a Tax Deducted at Source (TDS) on F&O transactions. This measure is expected to facilitate better tracking of market participants and discourage frequent speculative trading.
Rationale Behind the Proposal
The government and financial regulators have expressed concerns about the rapid growth in retail trading volumes in the derivatives market. Finance Minister Nirmala Sitharaman recently highlighted the potential risks posed by unchecked retail trading in F&O, emphasizing the need for policy intervention to safeguard market integrity and investor interests.
RBI Governor Shaktikanta Das also pointed out that the trading volumes in the derivatives market have surpassed India’s nominal GDP. The explosive growth in this sector has prompted the Reserve Bank of India (RBI) and the Securities and Exchange Board of India (SEBI) to closely monitor the situation. Das mentioned that SEBI is considering several measures to address the risks associated with the surge in options trading.
Market Impact and Regulatory Measures
India’s derivatives market has seen an extraordinary increase in trading volumes, with the turnover on the National Stock Exchange (NSE) rising from Rs 247.5 lakh crore in March 2020 to Rs 7,218 lakh crore in March 2024. This growth has been driven significantly by retail investors, who now account for 35% of derivative trading on Dalal Street.
In response to these developments, SEBI is considering implementing higher margin requirements for options contracts and mandating more comprehensive disclosures. These potential regulatory changes are the result of extensive consultations with exchanges, brokers, and fund houses over the past four months.
Conclusion
The proposed tax reclassification and the imposition of TDS on F&O income reflect the government’s intention to bring greater oversight and control to the derivatives market. By treating F&O income similarly to lottery and cryptocurrency income, the authorities aim to temper speculative trading and mitigate associated risks. As the government and regulatory bodies continue to monitor and address the rapid expansion of retail participation in derivatives trading, further policy changes are likely to emerge in the near future.
This move underscores a broader effort to ensure the stability and transparency of India’s financial markets, balancing the need for investor protection with the dynamic nature of modern trading practices.
