STT hike on options to pinch high-volume traders

The increase in STT takes effect only when one sells the option and will be charged on the premium value, not the contract value

The securities transaction tax (STT) on selling options is set to be raised to 0.05 per cent from the existing 0.017 per cent from Wednesday. Owing to Krishi Kalyan cess, an additional 0.5 per cent service tax will be levied on brokerage and transaction charges on all, including options. This will take the existing service tax rate from 14.5 per cent to 15 per cent.

Siddharth Bhamre, head of equity derivatives and technicals at Angel Broking, believes the impact on high net worth individuals and retail participants will be negligible. “It won’t reduce trading volumes but some of the jobbers and arbitrageurs (who do high volumes) will see a slight increase in cost,” he said.

“We do not see the rise in taxes as a deterrent to options trading volumes,” said Nithin Kamath, founder of Zerodha, a discount stock brokerage.

TWEAKING AROUND

• STT
  On selling options is set to be raised to 0.05 per cent from 0.017 per cent from Tuesday
   
• 0.5%
  Additional service tax will be levied on brokerage and transaction charges
   
• 15%
  Will be the existing service tax rate from 14.5 per cent earlier

The increase in STT takes effect only when one sells options and will be charged on the premium value, not the contract value. At present, STT on normal options trades done on exchanges is 0.017 per cent of the selling side of the premium value. STT on buy options positions that get exercised is 0.125 per cent of the entire contract value. There is no change in STT for the latter. For example, if you were to buy four lots of Nifty options at Rs 100 and sold these back at Rs 100, the break-even on this trade would now be Rs 100.05 instead of Rs 100.017.

If the daily options premium turnover for the entire market is Rs 3,000 crore, the overall impact of the hike in STT will be about Rs 100 crore for the entire year or Rs 50 lakh a day.

The impact of the cess is also expected to be minimal. For every Rs 1 crore of turnover, assuming Rs 1,000 is paid as brokerage and Rs 200 is paid to the exchange, the total cost comes to Rs 1,200. At 15 per cent, the client will have to pay Rs 180 as tax on this amount as opposed to Rs 174 earlier.