Securities Transaction Tax

What is Securities Transaction Tax (STT)

Securities Transaction Tax, or STT, is a direct tax levied by the Government of India on the purchase and sale of securities (such as stocks, bonds, and mutual funds) listed on recognised stock exchanges like the National Stock Exchange (NSE) and Bombay Stock Exchange (BSE). The tax was introduced under the Finance Act of 2004 to simplify the collection of taxes from the stock market and curb tax evasion, which was common due to underreporting of capital gains.

STT operates similarly to Tax Deducted at Source (TDS) in that it is deducted at the time of the transaction itself. The tax is paid directly to the government through the stock exchanges or other intermediaries involved in the transaction.

Key Features of STT

Collection at the Source: STT is deducted at the source, meaning it is collected at the time of the transaction and paid directly to the government.

Applicability: STT is applicable to equity shares, derivatives (futures and options), and equity-oriented mutual funds.

No Tax on Off-market Transactions: STT is only applicable to transactions conducted on recognised stock exchanges. It does not apply to off-market trades or private transactions.

Exemption for Long-term Holding: STT applies to both short-term and long-term capital gains. However, long-term capital gains are only taxed if the gains exceed a certain threshold, offering tax exemptions under certain conditions.

Tax Rate Changes: The government has the authority to revise STT rates periodically. These rates are fixed based on the type of financial instrument being traded.
 

How Does STT Work?

The application of STT is straightforward, but it varies depending on the type of transaction. Below is an outline of how STT works for different types of securities:

Equity Transactions (Delivery-based): For equity delivery trades, STT is charged at a rate of 0.1% on both the buy and sell sides of the transaction. A delivery-based trade is when you buy shares and hold them in your Demat account, intending to sell them at a later date.

Intraday Equity Transactions (Non-delivery): If you buy and sell the same security on the same day, this is considered an intraday trade. The STT for intraday equity transactions is 0.025%, and it is only charged on the sell side of the transaction.

For example, if you buy 500 shares of Reliance at ₹800 and sell them the same day at ₹810, the STT charged would be:

STT = 0.025 % × 810 × 500 = ₹101.25

Futures and Options (F&O): For futures and options, STT is lower. The tax rate for equity and index futures is 0.01% on the sell side of the transaction. For equity options, the rate is 0.0625% when the option is sold. If the option is exercised, the STT is 0.1% on the purchase side.

Equity-Oriented Mutual Funds: When you sell equity-oriented mutual fund units, STT is applicable at 0.025% for open-ended funds and 0.1% for close-ended funds.

Unlisted Shares (Public Offers): For shares that are not yet listed but are sold during a public offering (IPO), 0.2% STT is levied on the sale of shares once they are listed.
 

STT Rates for Different Securities

STT rates vary based on the type of transaction and the security involved. Below is a detailed table outlining the STT rates for different transactions:

Impact of STT on Traders and Investors

STT is designed to affect both investors and traders, but its impact differs depending on the type of market participant:

Impact on Investors: Long-term investors are primarily affected by STT on their sale of equity shares and mutual funds. However, for long-term holdings (more than 12 months), investors are exempt from long-term capital gains tax (LTCG) if the gains exceed ₹ 1 lakh in a financial year. The tax is payable only after the exemption limit is crossed. Although STT increases transaction costs for investors, it simplifies the process of tax reporting and ensures better compliance with tax regulations.

Impact on Traders: Traders, especially those involved in intraday trading or derivatives trading, are more affected by STT due to the higher frequency of transactions. The intraday STT rate of 0.025% on sell-side trades increases trading costs for active traders, which can significantly erode profits. For those trading in futures and options, the lower STT rate of 0.01% helps, but the cost of frequent trades still adds up.

Taxation of Capital Gains: While STT is not the same as capital gains tax, it plays a significant role in how capital gains are taxed. STT applies to both short-term and long-term capital gains, but the rates differ. For short-term capital gains (STCG), if securities are sold within 12 months, the gains are taxed at 15%, in addition to STT. For long-term capital gains (LTCG), the tax rate is 10% if the gains exceed ₹1 lakh per year.

Transparency and Compliance: STT has simplified the taxation of securities transactions. The tax is collected directly at the time of the trade, reducing the chances of underreporting or evading taxes. This transparency helps the government track capital flows and ensures that taxes are paid in a timely manner.
 

Conclusion

Securities Transaction Tax (STT) is a key tax in India’s stock market, ensuring compliance and transparency while simplifying tax collection. It may increase transaction costs but has reduced evasion and streamlined reporting. Understanding STT helps investors and traders plan better, stay compliant, and make informed financial decisions.