Avoid paying excess STT on Options Expiry

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 @ www.fyers.in, the youngest team to get NSE’s broker license. FYERS was started as a mission to enhance the terrain for traders and investors in India. He previously worked at Zerodha, Futures First & has been a professional trader for several years.

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Showing 15 comments
  • Anil Gupta
    Reply

    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

  • Goverdhan
    Reply

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

  • Umesh
    Reply

    Government wants to suck our blood.

  • Kiran
    Reply

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

  • Parag
    Reply

    @Kiran, you are right.

  • Parag
    Reply

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

  • Harish
    Reply

    Please file a case against government for looting investors and traders

  • keerti
    Reply

    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.

  • ch prasada rao
    Reply

    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
    Reply

    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.

  • Tejas Khoday
    Reply

    That’s the popular opinion everywhere.

  • Tejas Khoday
    Reply

    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.

  • Tejas Khoday
    Reply

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

  • Tejas Khoday
    Reply

    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.

  • Tejas Khoday
    Reply

    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.

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