Investors taking physical delivery of securities to settle derivative contracts will have to pay a tenfold higher transaction tax than those who settle in cash.
That’s because the taxman clarified to the Bombay High Court that the same securities transaction tax rate will apply to physical settlement in derivatives and equity segments. For taking delivery of shares, investors will now pay Rs 10,000 for every Rs 1 crore of transaction value, compared with Rs 1,000 earlier.
A bench comprising Justice B R Gavai and Justice M S Karnik had sought clarity from the Central Board of Direct Taxes on a petition filed by members of the National Stock Exchange of India Ltd. That stemmed from uncertainty over the securities transaction tax liability after the NSE shifted 46 stocks in the futures and options segment to compulsory delivery category starting July. The exchange’s move followed the market regulator’s order seeking a phased transition towards physical settlement of all equity derivatives.
The exchange asked brokers to collect the tax from clients based on the rate applicable in the derivatives segment, and also made the members liable to pay the differential in case the taxman seeks a higher rate.
The tax department clarified that a derivative contract being settled by taking delivery of shares would not be different from taking delivery of shares in an equity contract.
Investors usually opt to close out the positions ahead of the expiry of the contract, instead of taking delivery of securities. For July, the total value of physically settled securities in the derivatives segment was Rs 240 crore. That compares with the daily trading turnover of Rs 10 lakh crore. The August contracts expire this week—last Thursday of the month.
