Plan to change the head of F&O income
The government is considering taking new steps to reduce the participation of retail investors in the futures and options (F&O) segment. One major step could be to change F&O income from ‘business income’ to ‘speculative income’. If this happens, it will be treated like lottery or crypto investments.
How does the current tax system work?
Right now, income from F&O transactions is taxed as business income. This means that it is added to your other business or salary income and is taxed according to the slabs of 5%, 20%, and 30%. One big advantage of this is that the profit from F&O can be set-off against the loss of another business. For example, if you are incurring losses in your business and profits from F&O, you can reduce your total tax by combining them both.
What if it is converted into speculative income?
If F&O income is converted into speculative income, it will mean that losses can only be set-off against gains from F&O trading. This will be exactly what happens with cryptocurrencies. This means that if you make a loss in F&O, you cannot set it off against any other income.
Why does the government want to make this change?
“F&O trading is primarily speculative, and the government does not want retail investors to get involved in it, as their investment decisions are often influenced by informal sources rather than research,” said a lawyer.
Introduction of Tax Deducted at Source (TDS)
Another favourite tool of the government is tax deduction at source (TDS). In the Budget 2023-24, the government has introduced TDS on cryptocurrencies and the Liberalised Remittance Scheme (LRS). TDS will allow the government to keep track of investors in the F&O market. This will have the advantage that the government will have information about all the investors who are trading in F&O. Apart from this, the amount of TDS can be claimed only at the time of filing the return, which will motivate investors to file their tax returns on time.
Possible direct 30% tax
Some tax experts believe that a direct 30% tax can also be imposed on F&O income, like on crypto currency. This would mean that all income from F&O will be taxed at a direct 30%, regardless of your other income.
Market concerns and government response
The government, regulators, exchanges and fund houses have expressed concern over the increasing level of retail trading volumes in the derivatives market. About a month ago, Finance Minister Nirmala Sitharaman had said, “The explosion of uncontrolled retail trading in F&O can create future challenges not only for the market, but also for investor sentiment and household finances.”
RBI and SEBI monitoring
Reserve Bank of India (RBI) Governor Shaktikanta Das also said that RBI and Securities and Exchange Board of India (SEBI) are monitoring the high trading volume in the F&O segment. He said that if there is any need, SEBI will take action. He also informed that both the regulators have discussed this issue in the Financial Stability and Development Council (FSDC).
Status of investors in F&O market
According to a SEBI report, about 90% of retail investors lose money in the derivatives market. This means that most retail investors, who are trading in F&O, are suffering losses instead of profits.
Future direction
These concerns and possible steps of the government and regulators show that the F&O segment needs strict compliance of rules and concrete measures to protect investors.