Imagine investing about Rs 11,250 in the stock market and getting a return of Rs 6.08 lakh in a span of five minutes. But when the broker sends you the contract note, the securities transaction tax (STT) for the trade is over Rs 24 lakh — almost four times the profit — and it’s not a printing mistake. It happened with 27-year-old management student Chirag Gupta.
When about five minutes were left for the markets to close, Gupta saw that he could buy Nifty call options at 5 paise per unit and make a profit of around Rs 2.75 a unit.
He bought options that Nifty will close above 8,600 and it closed at 8,602.75.
Gupta bought all the Nifty lots (3,000) he could in the short span of time.
One Nifty lot has 75 units. Mumbai-based Chirag Gupta felt on the top of the world after trading hours on January 25 the expiry day of the month’s futures and options contracts.
Later, he realised that his broker had deducted over Rs 24 lakh from his trading account for STT.
Mr Chirag Gupta did not lose Rs. 24 Lakhs in 5 minutes.
Chirag Gupta actually earned a profit of Rs. 607500 on the trade he entered 5 minutes before the close on expiry day.
He bought NIFTY Options for Rs. 0.05 which he rightly guessed would be ending In The Money.
It ended up in the money by Rs. 2.75.
He had bought 3000 Lots ( Lot Size- 75 )
His profit = ( 2.75- 0.05 ) x 3000 x 75 = 607500.
It was a success story up to this point.
The dream turned into a nightmare when he found to his dismay that he had calculated the tax implication wrongly.
Securities Transaction Tax :
This tax applies when you SELL shares, futures or options contracts.
On worthless options, there is no tax.
On options which you square off, it applies at 0.05 % of the premium.
In the present case, if the option was squared off at Rs. 2.75 per share, the tax would have been Rs. 309.
But these were not squared off.
In the case of exercising of options ( or market settlement, as we call it), the tax is applied at 0.125% on the notional value of the option.
As the NIFTY had ended at 8602.75, thus causing the value of 8600 Call to become Rs. 2.75, the tax liability was calculated as:
The value of transaction = 8602.75 x 75 x 3000 = 1935618750
STT at 0.125 % works out to Rs. 2419523.
If the transaction was settled by Mr Gupta at the same price, STT would have been Rs. 309.
He ended up paying more than Rs. 24 Lakhs.
He did not lose it in the market.
This is an important point to note.
The tax law took away his profit and then some more.
Why he could not settle it himself? :
This point is getting lost in all the interaction on this topic and even in the petition being submitted to the Finance Minister by Mr Chirag Gupta.
The trade could not be settled because there would not be any buyers at Rs. 2.75.
Markets do not give 55 times return in 5 minutes. ( Rs. 0.05 to Rs. 2.75 is 55 times )
The market participants know the tax implication and that is built into the pricing. At no point in the last 5 minutes, the price would have been more than Rs. 0.05 or at best Rs. 0.10.
His tax per lot came to Rs. 806.41. He would have been profitable on NIFTY ending at 8611 or above.
Like he could assess that NIFTY will end above 8600 on expiry in 5 minutes from his BUY order, other parties had also assessed that it will not be going above 8610.
The final settled price is the weighted average price of the last 30 minutes of trading and not the actual last trade price.
So there was no price to settle in profit.
Hence, Mr Gupta could not or did not square off.
Unfortunately, he fell into what is called STT Trap.
Seller will not have to pay tax as he sold the option prior to settlement.
All of us have fallen into this trap at times, but the transaction was for one or two lots, hence bearable.
Rs. 24 lakhs is a huge penalty to pay for the ignorance of taxation rules.
All sympathies for Mr Gupta but that is how the tax law is.
To Conclude :
He has suffered a bad loss of about Rs. 18 Lakhs and not 24 lakhs as suggested by the question.
The loss cannot be called Stock Market loss. It is because of taxation.
It would be appropriate to know the story directly also from Mr Chirag Gupta
Why isn’t anybody doing anything about the Security Transaction Tax (STT)? Isn’t it a big risk?
Even though a lot of people have railed against this, I don’t think there is a resolution anywhere in sight. But as a guy who lost over 23 lakh in a few minutes due to STT on excised options, I have started this petition with a hope that this would change.
This is the incident that forced me to do something.
I had bought 8600 Nifty calls at 3.25 pm for Rs 0.05 as I was 100% sure that Nifty will close above 8600 based on my weighted average price calculations. True to my expectations, Nifty closed at 8602.75. I had bought 3000 lots of Nifty 8600 call options at 5 paise, paying a premium of Rs. 11250. By the numbers, you can see that I stood to make a profit of Rs. 6,07,500 (2.7* 2.25 lakh) right? But much to my chagrin I ended up losing over 23 lakh in the space of a few minutes.
I found out rather cruelly that STT on exercised options is 0.125% of the entire contract value as opposed to 0.05% of the premium value.
I beseech you to sign this petition on the matter.
Thanks for reading.