Lottery-like taxation: Fear grips F&O traders as 30% tax likely on transactions in budget
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The Modi government is likely to consider reclassifying futures and options transactions from ‘business income’ to ‘speculative income’ and this reclassification would place earnings from these derivatives in the same tax category as lottery winnings or cryptocurrency investments, which currently attract a flat tax rate of 30%..
It appears that the government has taken a serious note of the increasing number of retail investors losing their hard-earned money in futures and options (F&O) trading, influenced by social media influencers who promote F&O trading and mislead them about potential profits.
According to a recent report in the Financial Express, the Modi government is considering reclassifying futures and options transactions from ‘business income’ to ‘speculative income’. This reclassification would place earnings from these derivatives in the same tax category as lottery winnings or cryptocurrency investments, which currently attract a flat tax rate of 30%.
The F&O trading community, especially retail traders, has expressed dissatisfaction with this potential change, saying that it could unfairly burden traders. However, there are others who think such measures could be beneficial especially because over the last couple of years there has been a significant increase in speculative retail participation in F&Os.
What is F&O trading?
Futures and Options are derivative contracts that offer investors the ability to take substantial positions in stocks, commodities, or currencies with a relatively small amount of capital. This leverage provides the potential for significant profits, but it also entails higher risks. Sometimes, gains can accumulate rapidly like building a castle of money, but losses can also occur swiftly, akin to the castle crumbling like sand.
Derivative contracts, such as futures and options, derive their value from underlying assets. In futures and options trading, when you purchase a derivative, its value is tied to the underlying asset, such as a share. These contracts have fixed durations during which their prices fluctuate based on changes in the price of the underlying asset. Thus, the value of a futures or options contract mirrors the value of the asset it represents during the contract period.
How will a potential hike in taxes on F&O trades impact traders?
The proposed increase in taxes on F&O transactions is likely to have a significant impact on the market and the trading community. Currently, F&O transactions are taxed as business income, which allows traders to offset gains against other business losses.