The government is reportedly considering a higher tax rate on futures and options (F&O) transactions as part of its strategy to discourage retail participation in this segment.

What Happened: The government is mulling over the idea of reclassifying F&O transactions from ‘business income’ to ‘speculative income’, similar to the classification of lottery or cryptocurrency investments, according to The Financial Express.

This move could also involve the introduction of a tax-deductible-at-source (TDS) in the forthcoming Budget. The government and regulators have been expressing concerns about the increasing retail investor participation in the derivatives market, fearing significant losses to these investors if markets correct, which could lead to a dampening of sentiments.

See Also: PM Modi Applauds PSU Banks’ Role In Banking Sectors ‘Unbelievable Comeback’

Currently, income from F&O transactions is taxed as business income, which allows gains to be offset against any other loss. However, if reclassified as ‘speculative income’, losses can only be offset against gains from F&O trading, similar to cryptocurrencies.

The government is also contemplating the use of TDS as a tool to keep track of investors in the F&O market. The amount paid as TDS can only be claimed while filing returns, which may act as a deterrent.

Why It Matters: The proposed changes come in the wake of warnings from the government, regulators, exchanges, and fund houses about the unchecked rise in retail trading volume in the derivatives market. Last month, Finance Minister Nirmala Sitharaman warned that unchecked retail trading in F&O could pose future challenges for markets, investor sentiment, and household finances. The proposed tax changes are seen as a measure to curb excessive speculation and protect retail investors from potential heavy losses.

Read Next: Tata Communications Secures $250 Million Sustainability Linked Loan