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TAXATION OF DERIVATIVES TRANSACTIONS IN SECURITIES 

SECURITIES TRANSACTIONS TAX ON DERIVATIVES TRANSACTIONS

Finance Act (N0.2) of 2004 has introduced Securities Transactions Tax on all derivatives transactions entered into a recognized stock exchange. This tax is payable by the seller of the derivative instrument. The rate of tax free trading tips applicable on the same has been revised to 0.0133% of the value of taxable securities transaction by Finance Act, 2005. (It is subject to change from time to time).

The value of taxable securities transactions relating to “Option in securities” is the aggregate of the strike price and the option premium of such technical analysis “option in securities”. The value of taxable securities transaction relating to “futures” is the price at which such “futures” are traded.

Securities Transaction Tax Rules, 2004 provide for rounding off of the value taxable securities transaction, online trading tips amount of securities transaction tax, interest and penalty payable and the amount of refund due to the nearest rupee.

EXAMPLE – A: Mr.X sells a futures contract of M/s XYZ ltd., (Lot size: 1000) expiring on 29th sep, 2005 for Rs.300. The spot price of the share is Rs.290. The securities transaction tax thereon would be calculated as under:

1.   Total futures contract value = 1000×300 = Rs.3,00,000

2.  Securities transaction tax payable thereon is 0.0133% = 300000 x 0.0133% = Rs.40.

Note: No tax on such a transaction is payable by the buyer of the futures contract.

EXAMPLE – B: Mr. X Sells an options contract of M/s XYZ Ltd., (Lot size: 1000) expiring on 29th sep, 2005 for Rs.10. The strike price of the certificate in technical contract is Rs.300. The spot price of the share is Rs.290, The securities transaction tax there on would be calculated as follows:

1.    Total options contract value = 1000 x 300 = Rs.3,00,000

2.    Total options premium value = 1000 x 10 =Rs. 10,000

3.     Total value of securities transaction = Rs.3,10,000

4.     Securities transaction tax payable there on 0.0133% i.e., 3,10,000×0.0133 = Rs.41

NOTE: No Tax on such a transaction is payable by the buyer of the options contract.

TAXATION OF PR0FIT/I0SS ON DERIVATIVES TRANSACTIONS

Prior to Financial Year 2005-06, transaction in derivatives were onsidered as speculative transactions for the purpose of determination of tax liability under the Income Tax Act. This is in view of Section 43(5) of the Income Tax Act which defined speculative transaction as a transaction in which a contract for purchase or sale of any commodity, including stocks and shares, is periodically or ultimately settled otherwise than by the actual delivery or transfer of the option trading courses commodity or scrips. However, such transactions entered into by hedgers and stock exchange members in course of jobbing or arbitrage activity were specifically excluded from the purview of definition of speculative transaction.

In view of the above provisions, most of the transactions entered into in derivatives by investors and speculators were considered as speculative transactions. The tax provisions provided for differential treatment with respect to set off and carry forward of loss on such transactions. Loss on derivative transactions could be set off only against other speculative income and the same could not be set off against any other income. This resulted in payment of higher taxes by an assesse. Again, loss on derivative transactions which could not be set off against any other speculative gains could be carried forward for a period of four years. If such loss could not be set off against speculat.’ve income over the said period. The assesse could not claim any tax relief with respect to the loss suffered.

Finance Act, 2005 has amended section 43(5) so as to exclude transactions in derivatives carried out in a “Recognized Stock Exchange” for this purpose. This implies that income or loss on derivative transactions which are carried out in a “Recognized Stock Exchange” is not taxed as speculative income or loss. Thus, loss on derivative transactions can be set off against any other income during the year. In case the same cannot be set off it can be carried forward to subsequent assessment option trading courses year and set off against any other income of the subsequent year. Such losses can be carried forward for a period of 8 assessment years. It may also be noted that securities transaction tax paid on such transactions is eligible for rebate under section 88E of the Income Tax Act in the manner provided in the said Section.

 

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