20% levy on short-term capital gains has given young F&O traders a tax incentive
NEW DELHI : Ahead of the Union Budget 2024-25, rumours were rife that tax on futures and options (F&O) would be increased to curb the increasing retail participation in the derivatives market. But while the Centre didn't touch F&O, barring a nominal increase in securities transaction tax (STT), it increased tax on short- and long-term capital gains made from equity mutual funds or stocks (infrequent trades treated as capital assets). While the tax on short-term capital gains (STCG) was increased to 20% from 15%, the same on long-term capital gains (LTCG) was hiked to 12.5% from 10%.
But in an unintended outcome, the STCG tax hike has made F&O and frequent stock trading more lucrative from a tax perspective for some income groups. Income from F&O and frequent stock trading is treated as business income and taxed at slab rates. So, if the total income is less than ₹12 lakh, F&O gains will be taxed at 15%, 10% or less.
On the other hand, STCG from equity mutual funds or selling stocks qualifying as capital assets will be taxed at 20%. STCG, unlike LTCG, does not even get a tax exemption of ₹1.25 lakh. The tax-exempt amount was increased from ₹1 lakh to ₹1.25 lakh in the budget 2024.
Lower income groups will benefit from this on F&O and equity trading. “Since the effective rate of tax for business income would be less than 20%, the tax impact would be lesser. Of course, the traders should be lucky enough to earn that profit," said Prakash Hegde, a chartered accountant and principal consultant, direct taxation at Acer Tax & Corporate Services Llp.
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