F&O Transactions Could Face Increased Tax Rates

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F&O Transactions Could Face Increased Tax Rates

The government is exploring measures to curb retail participation in the futures and options (F&O) market. Proposed changes include reclassifying F&O from ‘business income’ to ‘speculative income’ and/or implementing a tax-deductible-at-source (TDS) in the upcoming Budget, according to informed sources.




A source noted, “The government and regulators have been concerned about the surge in retail investor activity in the derivatives market. There are fears that market corrections could lead to significant retail investor losses, negatively impacting overall market sentiment.” Reclassifying F&O income as ‘speculative income’ would equate it with lottery or cryptocurrency investments. Currently, F&O income is taxed as business income, which is combined with business/salary income and taxed at applicable slabs of 5%, 20%, and 30%. An advantage of the current classification is that gains can be offset against other losses. “Businessmen can offset F&O profits with losses in other businesses and vice-versa,” explained a lawyer.

However, if reclassified as ‘speculative income’, losses could only be offset against gains from F&O trading, similar to cryptocurrency transactions. “The government wants to discourage retail investors from F&O trading, as their decisions are often influenced by informal sources rather than research,” said another lawyer.

Another potential measure is the introduction of TDS, a strategy favored by the government in recent years. In the 2023-24 Budget, TDS was introduced on cryptocurrencies and the liberalised remittance scheme (LRS).

TDS would help the government track F&O market investors. Additionally, the need to claim TDS while filing returns may act as a deterrent. Other options include imposing a straight 30% tax on F&O income, akin to the tax on cryptocurrencies.

This comes amid warnings from the government, regulator, exchanges, and fund houses about the rising retail trading volume in the derivatives market. About a month ago, Finance Minister Nirmala Sitharaman remarked, “Any unchecked explosion in retail trading in F&O can create future challenges not just for the markets, but for investor sentiment and household finances.”

Her comments marked the first such caution from a senior government official about derivatives trading. Recently, Reserve Bank of India Governor Shaktikanta Das stated that both the RBI and the Securities and Exchange Board of India (Sebi) are monitoring high trading volumes in the F&O segment. While dismissing the notion of market overheating, he noted that Sebi would take necessary action. He also mentioned that this issue was discussed in the Financial Stability and Development Council (FSDC).

“Options and futures volumes are larger than the country’s nominal GDP. We have discussed this matter with Sebi, and they will handle it,” Das said at an event.

While the increasing number of retail investors in the F&O market is not problematic per se, a Sebi report indicated that around 90% of retail investors end up losing money in derivatives trading.

Disclaimer: The information provided in this article is based on sources and may be subject to changes in official policies. Investors should consult with financial advisors and stay updated with government announcements for accurate guidance.







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