Security Transaction Tax calculation in case of exercise options trade
Many investors face problems in security transaction tax calculation while trading options. This is due to levying of security transaction tax in different scenarios.
Scenario 1 : Security transaction tax calculation will be done on premium of the option only if the option is squared off by the investor before expiry of the contract at the rate of 0.017% only. In this case investor him self will square off his option position and does not leave the option open when it is in the money (STT will be applicable only for In the money options as out of the money options expire worthless).
Scenario 2: Security transaction tax calculation will be calculated on closing price of the underlying * Lot size and the security transaction tax calculation will be at the rate of 0.125% (which is more than 7 times of security transaction tax calculation done in scenario 1). It will happen when the option is In the Money and option is exercised by the exchange after expiry of the contract.
Many retail investors do not differentiate the tax structure and leave in the money options without square off before the expiry of the contract. Some times it results in negative returns due to high security transaction rate calculation although the option is in the money.
For Example if some one buys Nifty 5800 call option on Nov 12. On the Expiry date of the contract if nifty closes below 5800 the call option expires worth less.
If nifty is closing at 5805 and position is squared off by the investor before close of trading : STT will be calculated on premium @ 0.017% on premium of call sale value. Security transaction tax calculation will be as follows
Premium = 5 rupees and STT = 0.017% .
If nifty closed at 5805 and position is not squared off by the investor and exercised after expiry, then security transaction tax calculation will be
5805* 50 (nifty spot closing price * nifty lot size) * 0.125%
If the option is slightly in the money and is not squared off then after exercising of the option, there may be a negative return too…..
Below is NSE Circular No. : NSE/F&A/10706 Date: May 15, 2008 in this regard
Sub : Changes in relation to Securities Transaction Tax
Further to our earlier circular no.NSE/F&A/7527 dated May 26, 2006, we would like to inform you that as per the Finance Act 2008 (18 of 2008), which received the Presidential assent on May 10, 2008, the basis of levy of Securities Transaction Tax (STT) on sale of options and the value to be considered for “option in securities” with effect from 01st day of June, 2008 is revised as below.
Accordingly, STT on the transactions executed on the Exchange on or after June 01, 2008 shall be charged as indicated in Column D below.
Taxable securities transaction
Effective rate till 31.05.2008
New rate from 01.06.2008
|Sale of a derivative, where the transaction of such sale is entered into in a recognised stock exchange||0.017 per cent|
Refer (a,b,c) below
|Sale of an option in securities|
0.017 per cent
|Sale of an option in securities, where option is exercised|
0.125 per cent
|Sale of a futures in securities|
0.017 per cent
Further the value of taxable securities transaction in relation to “option in securities” is aggregate of strike price and the option premium of such option in securities, as defined under section 99 (a) of Chapter VII of the Finance (No.2) Act, 2004, till May 31, 2008.
With effect from June 01, 2008, the said definition is amended as under:
(a) Value of taxable securities transaction relating to an “option in securities” shall be the option premium, in case of sale of an option in securities.
(b) Value of taxable securities transaction relating to an “option in securities” shall be the settlement price, in case of sale of an option in securities, where option is exercised.
This is for information and compliance of the Trading Members and also for onward transmission to the constituents.
In case of any clarifications you may contact the undersigned or Mr. Lalit Bohara or Mr. Yogesh Mohite at 2659 8140 or 2659 8100 Ext.3081/2/3.
For National Stock Exchange of India Limited
Manager – Taxation