Option StrategiesTaxation

Avoid paying excess STT on Options Expiry

avoid STT

One fine day, Mr. X was holding an ITM (in-the- money) Call Option which he bought a few days ago and his position was going to expire on the same day. He was happy that he’d make handsome profit on the trade and he hence didn’t square off the position assuming it would get expired by end of the day. However, in the evening he received a contract note from his broker leaving him shocked for making a loss on his trade. He immediately called his broker in anxiety to know about the suffered losses and was informed that due to STT (Securities Transaction Tax) his actual profits turned into losses.

Imagine yourself in the above situation. If you are an active options trader then there is something which you must know about and that is the “Trap of STT on options expiry”.

Few things to analyze from the above case:
1. Why did the ITM option end up making loss on expiry? What went wrong by Mr. X?
2. Why is it necessary to square off ITM options rather than let them expire/lapse on the expiry day?
3. What is STT and how does it affect your profitability?
Let’s clarify the answers for each question above.

a. The reason why ITM option ended up making loss is because it was not squared off on the expiry day and hence considered as exercised by the holder (Mr. X) of the option. But what’s wrong with that! Ideally, whenever an option position is not squared off on expiry then the liability of paying STT is levied on the Buyer of the option.

Sl No Taxable Securities Transaction New Rate from 01.06.2016 Payable By
i Sale of an option in securities 0.05 per cent Seller
ii Sale of an option in securities, where option is exercised 0.125 per cent Buyer
iii Sale of a futures in securities 0.01 per cent Seller

b. Note that the value of an ITM option trades lesser than its actual theoretical value on expiry day since it gets adjusted to the STT (Securities Transaction Tax) component. Let’s take an example, assume it is the last day of expiry with Nifty at 8500 (spot price) and if you buy an 8450 CE or 8550 PE and hold it until the end of the day then theoretically the option premium should be Rs. 50 (Premium = Intrinsic value + Time Value). However, the actual option premium will have to adjust against the STT which is eventually levied on the Buyer of the option if considered exercised.

STT on Exercised options on Expiry of Options = 0.125 % * (Strike Price + Premium) * Quantity

Therefore in the above example, if you don’t square off the position before it expires then it will be considered as exercised and you as a buyer will have to pay Rs. 796.9 ((8450+50)*75*0.125%) as STT.

c. It is necessary to understand what the STT (Securities Transaction Tax) is and how it affects the profitability. STT is a type of tax levied on gains from securities. This includes mainly equities and futures and options. The rate of taxation is different for different types of securities. STT can basically be understood as a type of tax levied on transactions done in the domestic stock exchanges. Securities transaction tax (STT) is a direct tax and is levied and collected by the central government of India.
The most prominent point about securities transaction tax is that STT is applicable only on share transactions made through a recognized stock exchange in the country. Off-market share transactions are not covered under STT.

Points to remember:
• It is wise to square off an ITM option position before it gets expire to change your status from option “Buyer” to “Seller” and avoid paying STT on expiry.
• In case if you hold ATM (At the Money) or OTM (Out of the Money) options, then there’s no need of squaring it off as the option doesn’t hold any value, therefore the STT is not applicable on zero value options.
• Fyers is among few stockbrokers who intimate you (through email & SMS) to square off your ITM option position before expiry, if you hold any.
• Use our Options Strategies Lab to plan your options trades in a simple yet effective way. If you need to know how it works, read this useful post.

Tejas Khoday

Tejas Khoday

Tejas is the Co-Founder & CEO at FYERS, the youngest team to get NSE’s broker license. He has a specialization in finance and has over 10 years of work experience spanning across proprietary trading, risk management, and broking. Tejas & his team started FYERS, a technology-focused brokerage as a mission to transform the trading/investment landscape in India.

32 Comments

  • Amish says:

    I wish Government encourages traders to trade and provide liquidity to investors..l why always tax tax tax? Thank you for enlightening on this. I wish Fyers all the very best. Everyone is speaking about you in whatsapp and telegram… currently I am taking a break from trading and all.. whenver I choose to come back I will deinititely open an account with Fyers. Thank you tejas.

  • Arun says:

    Very useful post…

  • Robin Mathew says:

    Tejas Khoday, 30 Day challenge and your recent mobile charts is awesome. One request – pls make sure that the payout happens in instant just like payins.

    • Tejas Khoday Tejas Khoday says:

      Hi Robin, glad you like our initiatives. The payout process is a standard one. Once you place a payout request (Before 6PM on a working day), it will be processed on the same day and you will receive funds in the banking hours the next day. Instant payouts mechanism needs to be developed by the banks and it needs to be integrated via payment gateway which I don’t think will happen anytime soon.

  • Trade_Guru says:

    I am regularly getting your notifications on Mobile. Thanks for that.. Many times I forget about this and my other broker never told me anything in fact my previous broker used to make me buy expiring options at 3pm telling you can multiply money. Thanks for the clarity. You are spreading awareness in a good way

    • Tejas Khoday Tejas Khoday says:

      Happy to help @Trade_Guru. Sometimes, we tried to refrain from sending too many notifications as you can imagine how people are overloaded with them anyways because of other apps. Since options expiry is important, we make it a priority to inform everyone.

  • Santosh says:

    Thanks for clearing this confusion. I wish my previous broker would have told me this.

  • Ratnakar says:

    Very useful and informative post by you Tejas. I have an account with Canara Securities since many years but didn’t do much. I have read very positive things about Fyers and wiill open account with you hope the experience will be much better. thank you.

    • Tejas Khoday Tejas Khoday says:

      Thanks Ratnakar. Yes, do open an account with us and see for yourself. We’ll do our best to ensure you get what you need most.

  • Rushil_Basavaraj says:

    Is STT applicable for NRis?

  • Harshvardhan says:

    Tejas, can you as a broker square of my ITM positions if I give you prior permission on every expiry day?

    • Tejas Khoday Tejas Khoday says:

      Hi Harshvardhan, no we cannot do that unless you’ve chosen “INTRADAY” product type. In this case, the position will be squared off at 3:20 PM automatically.

  • Ravi says:

    Thanks for the Tejas it was very informative.

  • Pankaj Jain says:

    Hi Tejas,

    You mentioned about availability of weekly options. I have not heard about them. Could you please throw some more light on this.

    Thanks.

    • Tejas Khoday Tejas Khoday says:

      Hey Pankaj, Bank Nifty Weekly options are available as mentioned in the post. Weekly options have not been introduced for other indices/stocks. Currently, the trading volumes in Bank Nifty weekly options are super high.

  • ksshaha says:

    Hi Tejas,

    Could you please able to throw some light on recent changes from NSE/BSE on “Do not Exercise” facility for options? My broker is saying that if STT>Premium amount then only it’ll be marked as “Do Not Exercise”. I believe the circular from NSE/BSE (dated 22 Aug’17 & 6 Sep’17 respectively); says 3 immediate Close To Money (CTM) option strikes should be marked as “Do Not Exercise”. What’s your/FYERS view on this?……….Thanks

  • ch prasada rao says:

    on 13-07-2017,I bought banknifty 23900 put 0ption 400 nos(10lots) @rs 7.74/-(average).Total money involved is rs 3096/-.bank nifty spot closed @23888.65.I thought i will get the difference(23900-23888.65=11.35*400) and i din’t close the contract.for my surprise contract note come with stt of 11935/-. very unfair.No where in the world, for a business turnover of Rs3096 levy of stt of 11935/-.while buying, you take only option premium as my eligibility and as my turnover,whereas in case of exrcised option they take nifty nos as value.Double Standerd calculatins .some one help me .where i should to fight the ugly system of calculatins just to collect money from the people like me.

    • Tejas Khoday Tejas Khoday says:

      Hello, I completely agree with you. The taxation of options can be a huge penalty for traders. We used to send out messages every expiry day reminding traders to close out their in the money options trades to avoid STT. But after weekly options were introduced, sending a message every week could irritate clients so we stopped. Currently, brokers have put forward their concern to the government regarding this and we’d be lucky if things changed. Many have paid the price. Start an online petition that’s as much as you can do if you want to approach them I guess. But don’t worry, some prominent brokers have expressed their concern to the government already.

  • keerti says:

    Is STT levied on the buyer of the option only?

    I plan to sell covered call options in the near future. Please let me know whether I should square off the transaction by buying the sold option back or should I let it expire on its own?

    If I am getting to keep the whole premium paid due to the underlying stock remaining rangebound, I request you to clarify what I should do near expiry. Please elaborate on STT implications for option writers. Thanks.

    • Tejas Khoday Tejas Khoday says:

      Keerti, as I have mentioned in the post, STT is applicable if you are the buyer of the option. IF you sell call options and want to square it off, you will not be charged even if it was ITH. Hope this clarifies.

  • Harish says:

    Please file a case against government for looting investors and traders

    • Tejas Khoday Tejas Khoday says:

      There was a petition floating around lately. So far, such efforts have not yielded any result.

  • Parag says:

    Gvernment should remove STT and or atleast make states remove stamp duty on securities.

    • Tejas Khoday Tejas Khoday says:

      STT is a tax levied by the central government whereas stamp duty is levied by the states. Hence, the centre has a limited say in this matter. Stamp tax reform is key to encourage transactions in the stock markets as it is for real estate but since a very high percentage of state government revenues are from Stamp duty, they’re not really inclined to change or remove them altogether.

  • Parag says:

    @Kiran, you are right.

  • Kiran says:

    Thank you 4 throwing light.. the main picture is exactly what govt. is doing to its people.

  • Umesh says:

    Government wants to suck our blood.

  • Goverdhan says:

    Government is overtaxing traders for sure. They consider our life’s purpose is to pay tax only.

  • Anil Gupta says:

    Bought 15000 DLF 30 MARCH 2017 CE at average rate of 5.27 on 2/3/17 Stock not performing well What should I do?
    A K GUPTA
    FA 0021
    Fyers Client

    • Tejas Khoday Tejas Khoday says:

      Hi AK Gupta, we do not give stock tips or advice such as the one you’re seeking. If you think something is not working, you should exit your position without building in hope. If the strike price of the CE is not very far away, then you have a little waiting power but don’t take that for granted in options as premiums can go fast if an adverse move happens.

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