Budget may impose higher tax on F&O income by treating derivatives like lottery: Report (2024)

Worried about hyperactive retail traders losing tons of money in the derivatives market, the government is said to be considering a proposal to impose higher income tax on futures and options (F&O) by treating it akin to income from lottery or cryptocurrencies in the Union Budget, according to a report.

The government is considering adjustments to the tax treatment of F&O transactions by reclassifying it from 'business income' to 'speculative income' and even imposing a TDS, Financial Express reported.

Being planned to curb retail participation in the derivatives market, the change will mean that F&O income may start getting the same tax treatment as lotteries and cryptocurrencies.

Currently, income from F&O transactions is treated as business income and taxed according to income slabs of 5%, 20%, and 30%. The existing classification also allows gains from F&O to be offset against losses from other business activities.

Applying TDS to F&O would allow the government to track investors in the market more effectively and also deter frequent trading, according to the report.

There are also speculations in the market that the Budget may impose a 30% tax, similar to crypto investments, on F&O income.

This regulatory scrutiny arises amidst concerns from various stakeholders, including the government, regulators, exchanges, and fund houses, over the sharp rise in retail trading volumes within the derivatives market.

About a month ago, Finance Minister Nirmala Sitharaman commented on the issue, signaling potential policy changes. "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," Sitharaman had stated.

Earlier this week, RBI Governor Shaktikanta Das said volumes in the derivatives market are perhaps larger than the nominal GDP of India.

"The early warning group is monitoring that. Sebi and the Reserve Bank, together we are monitoring that...Sebi has taken a few measures and they are examining it and I think they will deal with it," Das said at ET Now Leadership Dialogues on Tuesday.

Out of the 108 billion options contracts traded worldwide last year, 78% were from Dalal Street where retailers make up 35% of derivative trading.

The derivatives turnover on the NSE has surged 30 times from Rs 247.5 lakh crore in March 2020 to Rs 7,218 lakh crore in March 2024.

In the meantime, Sebi is said to be considering a series of tweaks to its derivative trading rules to address risks arising from an explosive growth in options trading.

The new rules could include higher margins for options contracts and more detailed disclosures and are being considered after a series of meetings with exchanges, brokers, and fund houses over the past four months, according to a report by Reuters.