Changes in relation to Securities Transaction Tax on options trading kick in from September 1

Where option is exercised, STT at the prescribed rate shall be levied on the “intrinsic value” instead of the settlement price as at present

Kumar Shankar Roy Aug 21, 2019

STT optionsCome September 1, the Securities Transaction Tax (STT) will be streamlined by restricting it to only the difference between settlement and strike prices in case of exercise of options. At present, STT is charged on the entire contract value for options.

STT is a tax charged on every purchase or sale of listed securities. The change in STT will mean that options traders don’t have to be worried about compulsorily squaring off in-the-money options before expiry.

The move was announced in the 2019-20 Budget by finance minister Nirmala Sitharaman.

“With effect from September 1, 2019 where option is exercised, STT at the prescribed rate shall be levied on the “intrinsic value” instead of the settlement price as at present. Further, in this regard the intrinsic value has been defined as the difference between the settlement price and the strike price of the option,” an NSE circular dated August 20 said.

The Finance (No.2) Act, 2019 which received the President assent on August 1, 2019, has amended the value of the taxable securities transaction in relation to serial no. 4(b) of the table under section 98 of the Finance (No.2) Act, 2004 pertaining to “sale of an option in securities, where option is exercised”.

Currently, most traders are squaring off their positions ‘In The Money’ (ITM) to prevent higher STT outflow. Squaring off means a trader buys or sells a particular quantity of a security/asset and later reverses the transaction, in the hope of earning a profit. ITM indicates that the option has value in a strike price favourable in comparison to the prevailing market price of the underlying asset.

For options that close In The Money, the new STT norms would not force traders to square up in the last hour of trading as was the case earlier. Most traders would try squaring up to avoid the higher STT that made it expensive to hold onto a position that was in the money ahead of expiry. Now the cost is not restrictive and one can allow it to expire in the money to lock in gains.

At present, if an option contract is exercised, the trader had to pay STT of 0.125% of the settlement price. If the option is not exercised, then the STT was 0.05% of the premium. This situation changes from September 1. Imagine you are a derivative trader. You exercise your options and your ITM (In The Money) option strike was, say 11800, on expiry with the spot at 11900.

At present, you would have to pay STT of 11900*75*0.00125 = Rs 1,115. But from September 1, now STT will be (11900 – 11800)*75*0.00125 = Rs 9.375. That is a huge reduction because in the previous method STT was calculated on the entire settlement price.

Related: Modi 2.0 Budget: Your options trades to get cheaper thanks to Securities Transaction Tax relief

Kumar Shankar Roy

Kumar Shankar Roy is contributing editor with RupeeIQ. Kumar is a financial journalist, with a functional experience of 15 years. He tracks mutual funds, insurance, pension, PMS, fixed income/debt and alternative investments markets closely. He has worked for The Times of India, The Hindu Business Line, Deccan Chronicle Group, DNA, and Value Research, among others, across different cities in India. He is deeply interested in marrying data insights with actionable opinion. He can be contacted at [email protected].

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