NEW DELHI
:
Ahead of the Union Budget 2024-25, rumours were rife that tax on futures and options (F&O) would be increased to curb the increasing retail participation in the derivatives market. But while the Centre didn’t touch F&O, barring a nominal increase in securities transaction tax (STT), it increased tax on short- and long-term capital gains made from equity mutual funds or stocks (infrequent trades treated as capital assets).
While the tax on short-term capital gains (STCG) was increased to 20% from 15%, the same on long-term capital gains (LTCG) was hiked to 12.5% from 10%.
But in an unintended outcome, the STCG tax hike has made F&O and frequent stock trading more lucrative from a tax perspective for some income groups.
Here’s why
Income from F&O and frequent stock trading is treated as business income and taxed at slab rates. So, if the total income is less than ₹12 lakh, F&O gains will be taxed at 15%, 10% or less. On the other hand, STCG from equity mutual funds or selling stocks qualifying as capital assets will be taxed at 20%. STCG, unlike LTCG, does not even get a tax exemption of ₹1.25 lakh. The tax-exempt amount was increased from ₹1 lakh to ₹1.25 lakh in the budget 2024.
Lower income groups will benefit from this on F&O and equity trading. “Since the effective rate of tax for business income would be less than 20%, the tax impact would be lesser. Of course, the traders should be lucky enough to earn that profit,” said Prakash Hegde, a chartered accountant and principal consultant, direct taxation at Acer Tax & Corporate Services Llp.
Mint’s calculation shows that even taxpayers in the 20% tax bracket will get this benefit due to the slab rate calculation applicable to business income as opposed to the flat 20% tax rate charged to STCG.
Take the case of two salaried individuals, A and B, earning ₹12 lakh each annually. Say A earns ₹1 lakh profit from F&O trading and B makes ₹1 lakh STCG from an equity mutual fund. Under the new tax regime, both are in the 20% tax bracket. But A will pay ₹85,000 in tax, whereas B will pay ₹88,750. Under the same assumptions, incomes up to ₹14 lakh, including F&O gains, will invite less tax.
For ease of calculation, we have considered the new tax regime because the old regime includes several deductions and exemptions. However, even under the old regime, people earning up to ₹10 lakh will pay less tax if they choose to invest in F&O instead of equity mutual funds.
After the budget, young professionals in these income brackets have more tax incentives for investing in F&O than equity funds like arbitrage mutual funds for the short term or buying and selling stocks as capital assets.
A recent Securities and Exchange Board of India (Sebi) report showed that young individuals aged 30 and below made up 50% of the total F&O traders in 2022-23. The budget 2024 tax tweak could push this number further up.
However, Sebi’s proposal to raise the derivatives contract size to ₹15 lakh (eventually ₹25 lakh) from the current ₹5 lakh might impact small investors who can get this tax benefit. Traders in these income groups are likely to not have adequate capital to trade in derivatives after the increase in contract sizes.
