Securities Transaction Tax (STT) is a direct tax levied on every purchase and sale of securities listed on recognized stock exchanges in India. Introduced in the Union Budget of 2004 by the then Finance Minister, STT was implemented to curb tax evasion on capital gains arising from securities transactions. By taxing transactions at the source, the government ensures a steady stream of revenue while promoting transparency in the financial markets.

STT applies to various securities, including equity shares, derivatives, equity-oriented mutual funds, and unlisted shares sold under an offer for sale to the public and subsequently listed. The tax is collected by the stock exchange or the authorized intermediaries at the time of the transaction, making compliance straightforward for investors and traders.

Features of Securities Transaction Tax

1. Wide Applicability:

STT covers a broad spectrum of securities transactions:

• Equity Shares: Applies to both delivery-based and intraday transactions.
• Derivatives: Includes futures and options traded on recognized exchanges.
• Equity-Oriented Mutual Funds: Units traded on stock exchanges.
• Unlisted Shares: When sold under an offer for sale to the public and subsequently listed.

2. Transparent Collection Mechanism:

The tax is seamlessly collected at the transaction point by the stock exchanges or authorized entities. This method reduces the administrative burden on both the government and taxpayers.

3. Non-Applicability to Certain Transactions:

STT does not apply to:

• Off-Market Transactions: Private transfers of securities outside the stock exchanges.
• Commodities and Currency Trades: Transactions in commodity and currency markets are excluded.

4. Government Revenue Generation:

STT contributes significantly to the government's revenue without imposing additional compliance requirements on taxpayers.

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How Does Securities Transaction Tax Work?

STT is calculated as a percentage of the transaction value, varying based on the type of security and the nature of the transaction (buy or sell). Here's how it operates:

• Calculation Example:

Suppose an investor purchases equity shares worth ₹1,00,000 in a delivery-based transaction. With an STT rate of 0.1% on the purchase side, the STT would be:

STT = Transaction Value × STT Rate = ₹1,00,000 × 0.1% = ₹100

• Payment Responsibility:

  • Equity Delivery Trades: Both buyer and seller pay STT at 0.1% each.
  • Equity Intraday Trades: Seller pays STT at 0.025%.
  • Futures and Options: Seller pays STT at different rates.

The tax is automatically added to the transaction, and investors can see the STT amount in their contract notes provided by the broker.​​​​​​​

Impact of Securities Transaction Tax on Investors

1. Increased Transaction Costs:

STT adds to the overall cost of trading, which can affect:

• Retail Investors: Higher costs may reduce profit margins, especially in frequent trading strategies.
• High-Frequency Traders: Even small changes in transaction costs can impact profitability due to large volumes.

2. Influence on Trading Behaviour:

The additional cost may discourage excessive speculative trading, promoting a more stable market environment with long-term investment perspectives.

3. Market Liquidity:

While STT aims to reduce speculative trades, it may inadvertently affect market liquidity by lowering trading volumes.

4. Tax Compliance and Simplicity:

STT simplifies tax compliance by embedding the tax within the transaction process, reducing the scope for tax evasion on capital gains.

What is the Securities Transaction Tax Rate?

Securities Transaction Tax (STT) rates vary depending on the type of security and the nature of the transaction. For equity shares, delivery-based trades attract a 0.1% STT on both the purchase and sale, while intraday trades are subject to a 0.025% STT on the sale side only. In derivatives, equity futures transactions incur a 0.01% STT on the sale, while equity options attract a 0.05% STT on the premium for sale transactions and 0.125% on the settlement price if exercised.​​​​​​​

For equity-oriented mutual funds, a nominal STT of 0.001% is charged on the sale. In the case of unlisted shares sold under an offer for sale, a higher rate of 0.2% applies to the sale. These rates, though relatively small, can significantly influence transaction costs and impact the net returns on investments, making it essential for investors to factor STT into their trading and investment strategies.

STT Applicability

1. Equity Shares:

STT applies to all equity shares listed on recognized stock exchanges in India. This includes:

• Delivery-Based Transactions: Both buying and selling attract STT.
• Intraday Trading: Only the sale transaction is subject to STT.

2. Derivatives:

Derivatives traded on recognized exchanges are subject to STT:

• Futures: STT is levied on the sale transaction.
• Options: STT is applicable when the option is sold or exercised.

3. Equity-Oriented Mutual Funds:

STT is levied when units of equity-oriented mutual funds are sold on a stock exchange.

4. Exemptions and Non-Applicability:

STT does not apply to:

• Off-Market Transactions: Private transfers not routed through stock exchanges.
• Bonds and Debentures: Generally, exempt unless specified.
• Currency and Commodity Trades: These are outside the purview of STT.

STT Exemption under Income Tax:

STT plays a crucial role in the taxation of capital gains:

• Short-Term Capital Gains (STCG):

  • Transactions where STT has been paid are taxed at a concessional rate of 15%.
  • This is beneficial compared to the normal income tax rates, which could be higher.

• Long-Term Capital Gains (LTCG):

  • Gains above ₹1 lakh from the sale of equity shares and equity-oriented mutual funds held for more than one year are taxed at 10% without indexation benefits.
  • Gains up to ₹1 lakh are exempt from tax.

Benefit of STT Payment:

Paying STT ensures eligibility for these concessional tax rates, encouraging compliance and reducing the temptation to evade taxes on capital gains.

Conclusion

Securities Transaction Tax is more than just an additional cost on securities transactions; it is a significant tool for promoting tax compliance and transparency in India's financial markets. By ensuring that taxes on capital gains are collected at the source, STT simplifies the taxation process for investors and the government alike.

Understanding STT is essential for anyone participating in India's stock markets, as it directly affects investment profitability and tax obligations. By staying informed, investors can make better decisions and contribute to a transparent and robust financial ecosystem.

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