The government is exploring measures to discourage retail participation in the futures and options (F&O) segment, as the increased involvement of retail investors in the derivatives market has raised concerns. Options being considered include reclassifying F&O income from ‘business income’ to ‘speculative income’ and the potential introduction of tax-deductible-at-source (TDS) in the upcoming Budget. Sources indicate that authorities are worried about potential losses to retail investors in the event of market corrections, which could adversely impact market sentiments.
Currently, income from F&O transactions is taxed as business income, with the flexibility to offset gains against other business losses. However, the proposed reclassification to ‘speculative income‘ could restrict offsetting losses to gains only from F&O trading, similar to crypto currencies. This move aims to discourage the speculative nature of F&O trading and the reliance of retail investors on informal sources for investment decisions.
Furthermore, the government is contemplating the implementation of TDS to track F&O market investors and potentially deter participation. This approach, as seen in the case of crypto currencies, could contribute to enhanced monitoring and serve as a deterrent, with the possibility of a straight 30% tax on F&O income also under consideration.
Amid growing concerns regarding retail trading volume in the derivatives market, Finance Minister Nirmala Sitharaman and RBI Governor Shaktikanta Das have both expressed apprehension about the situation. Emphasizing the need to address the escalating retail involvement in the F&O market, regulatory bodies such as RBI and Sebi are closely monitoring the high trading volume and considering necessary action. The increasing retail investor attraction to the F&O market presents challenges for both market stability and investor sentiment, with reports indicating that around 90% of retail investors end up experiencing losses in the derivatives market.