Tax changes from October 1: In her first Budget presentation under the Modi 3.0 government, Finance Minister Nirmala Sitharaman introduced significant alterations to the taxation system, particularly affecting investors and shareholders. Among the key changes announced was the hike of the securities transaction tax (STT) on Futures & Options (F&O) of securities to 0.02% and 0.1%, and the decision to tax income received from share buybacks in the hands of recipients.
Here’s a close look at the changes:
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1. Securities transaction tax
Securities Transaction Tax (STT) is a compulsory levy charged as a percentage of the transaction value, with a rate of 0.1% for delivery-based equity share trades.
STT was introduced during the 2004 Budget and officially implemented in October 2004 by the then-Finance Minister, P. Chidambaram. The main objective behind the introduction of STT was to address tax evasion issues associated with capital gains. Initially, it was anticipated that STT would eventually replace the long-term capital gains (LTCG) tax.
Securities transaction tax applies to various financial instruments such as stocks, futures, options, mutual funds, and exchange-traded funds. It’s important to note that the STT rate differs based on the type of transaction, whether it is an intraday or delivery transaction, as well as on whether you are buying or selling a security.
STT will apply to transactions conducted on exchanges. To qualify for an exemption on long-term capital gains, the asset must be subject to STT.
In the Union Budget 2024, the FM said: “It is proposed to increase the rates of STT on sale of an option in securities from 0.0625 percent to 0.1 percent of the option premium, and on sale of a futures in securities from 0.0125 percent to 0.02 per cent of the price at which such futures are traded.”
KC Jacob, Counsel, Economic Laws Practice, said: “The RBI and SEBI have expressed concerns about investor safety, noting that retail traders often lose money in the F&O segment. The proposed increase in STT on F&O trades can be seen as a measure to address these concerns raised by the RBI and SEBI before the budget. This move by the government aims to increase tax revenue and discourage retail investors from F&O trading. However, historical data shows that the imposition of STT has not negatively affected trading in this segment; in fact, turnover in the F&O segment has grown significantly. It will be interesting to see if the proposed increase will deter retail investors from trading in this segment.”
2. TDS on government bonds
The FY25 Union Budget proposed from October 1, 2024, investors have to pay a 10 per cent Tax Deducted at Source (TDS) outgo when investing in Central Government Securities (G-Secs) and State Development Loans (SDLs), including floating rate bonds. During the announcement of the Union Budget for the last fiscal year, a 10% TDS was introduced on interest payments for listed bonds (debentures) effective from April 1, 2023.
This year, one of the affected bonds under this new TDS regulation is the Floating Rate Savings Bond. Consequently, individuals investing in these bonds will observe TDS deductions from their interest earnings, leading to a direct effect on the after-tax returns associated with such bonds.
The Reserve Bank of India offers Fixed-Income Floating Rate Savings Bonds to retail investors. These bonds, also known as FRSBs, are issued by the central government and cannot be traded. Investors are required to hold the bonds for a minimum of 7 years. Additionally, these RBI Floating Rate Savings Bonds offer a 0.35% spread above the current national savings certificate rate.
3. Buyback of shares
According to the latest regulations outlined in Budget 2024, there will be a notable shift in the tax responsibilities related to buyback strategies. Initially, companies were subject to a 20% tax on buybacks, however, this will no longer be the case. Instead, shareholders will now bear the tax burden on buyback proceeds, taxed as dividend income based on their individual tax brackets.
Furthermore, companies will now be mandated to withhold tax at source (TDS) on buyback proceeds at a rate of 10% for resident individuals and 20% for non-resident individuals. Additionally, shareholders will have the option to claim the cost of shares bought back as a capital loss, which can be utilized to offset gains from other share sales.
The revised tax structure may lead to companies reconsidering the use of buybacks as a primary method of returning capital, given the increased tax implications for shareholders.
The government stands to benefit significantly from the new buyback tax, which could potentially increase tax collection by up to 39%. Experts note that the buyback tax rate is notably higher than the 12.5% long-term capital gains tax and the 20% short-term capital gains tax applicable when shares are sold to other investors.