- Collection at source: STT is deducted at the moment of transaction and remitted directly to the government.
- Applicability: It applies to equity shares, derivatives (futures & options) and equity oriented mutual funds.
- Excludes off market trades: Only trades executed on recognised stock exchanges attract STT; private or off market deals do not.
- Long term holding exemption: Both short and long term gains incur STT, but long term gains below prescribed thresholds may be exempt.
- Variable rates: The government periodically revises rates according to the instrument traded.
How does Securities Transaction Tax work?
Securities Transaction Tax (STT) works by applying a tax on the transaction value whenever you buy or sell certain securities, like stocks, in the Indian stock markets. The STT is levied to ensure that the investors end up paying a tax for the services they use of the Indian stock end and to facilitate the government in earning more income through taxes. The Indian government replaced an earlier tax called ‘Stamp duty’ with Securities Transaction Tax (STT) in 2004 as they improved the taxation system.
The Indian government levies STT on both buyers and sellers, and the tax rate varies depending on the type of security and whether you're buying or selling. For example, when you buy or sell equity shares, an STT of 0.1% is applied to the transaction value. The tax is automatically deducted by the stock exchange and paid to the government, making it a straightforward process for the investor.
The stock exchanges from which an investor buys and sells securities deduct the STT from the buy-and-sell order. Once deducted, they are liable to deposit the STT with the Indian government within a specific time frame.
STT adds to the cost of trading, impacting the overall profitability, especially for frequent traders. Since STT is non-refundable, investors argue that it hurts market liquidity and reduces the overall returns. An example of STT is if you buy 200 shares of a company at Rs. 500 per share, the total transaction value is Rs. 1,00,000. With an STT rate of 0.1%, you would pay Rs. 100 as STT.
How does STT work?
STT charges for different order types
Securities Transaction Tax charges vary based on the order type. Delivery-based equity trades incur 0.1% on both buy and sell sides. Intraday trades attract 0.025% on the sell side only. Futures are taxed at 0.01% (sell side), while options incur 0.0625% when sold and 0.1% if exercised.
Order Type
|
New Charges (Effective 1st Oct 2024)
|
Old Charges
|
Equity Intraday
|
0.025% (₹25 per lakh) on the sell side
|
0.025% (₹25 per lakh) on the sell side
|
Equity Delivery
|
0.1% (₹100 per lakh) on both buy and sell sides
|
0.1% (₹100 per lakh) on both buy and sell sides
|
Options
|
- 0.125% of the intrinsic value when bought and exercised - 0.1% of the premium when shorted
|
- 0.125% of the intrinsic value when bought and exercised - 0.0625% of the premium when shorted
|
Futures
|
0.02% (₹20 per lakh) on the sell side
|
0.0125% (₹12.5 per lakh) on the sell side
|
These revised security transaction tax rates impact traders and investors, influencing their overall transaction costs in the securities market.
The importance of Securities Transaction Tax
Introduced by the Finance Act 2004, STT streamlines stock market tax collection and deters evasion from underreported capital gains. Charged at transaction time, it mirrors the Tax Deducted at Source mechanism.
Revenue generation: One of the primary reasons for implementing the STT is to generate revenue for the government. The tax collected from securities transactions contributes to the overall tax revenue, which can be used to fund various public welfare initiatives, infrastructure development, and government expenditures.
Regulatory tool: The STT serves as a regulatory tool for monitoring and overseeing trading activities in the securities market. The tax helps authorities track transactions and identify any potential market manipulation or suspicious activities.
Despite these advantages, it's essential to consider potential drawbacks and limitations of the STT:
Impact on trading volumes: High STT rates may lead to reduced trading volumes as investors might be discouraged from frequent trading due to increased transaction costs.
Potential shift to other instruments: In some cases, the imposition of STT on certain securities might lead to investors shifting their focus to other investment instruments that are not subject to the tax, potentially distorting investment patterns.
How does Securities Transaction Tax work?
STT calculation
The STT calculation is done based on the type of transaction and the value of securities traded. STT is calculated as a percentage of the transaction value.
Here's an example for a better understanding of STT calculation:
If you buy 200 shares of ABC Bank at Rs. 1,200 per share for delivery and hold them in your Demat account, a STT charge of 0.1% (STT rate) x Rs. 1,200 (buying price) x 200 (shares) = Rs. 240 would be levied on the transaction. This STT is applied at the time of purchasing the shares.
Impact of Securities Transaction Tax on investors
STT increases transaction costs, particularly impacting short-term and intraday traders, which may lower overall returns because of the additional tax expense.
- Increased transaction cost: STT is levied on buy and sell orders when investors buy or sell securities. It can lower the initial investment amount at the time of buying and the final redemption amount at the time of selling, affecting the overall return potential.
- Reduced liquidity: STT reduces market liquidity as some investors choose to stay away from securities that come with a higher STT rate. Since fewer buyers and sellers are available, it becomes difficult for existing buyers and sellers to buy and sell their securities easily.
- Impact on investment strategy: The STT rate can greatly impact the investment strategy and force investors to change it based on the STT rate. Investors avoid securities that attract a high STT rate or only choose long-term investments, even when their goal is to earn quick short-term returns.
- Effect on profitability: Since STT is applied regardless of whether the trade is profitable or not, it directly reduces the gains from successful trades and increases the losses from unsuccessful ones. This can affect overall portfolio performance.
- Security pricing: If a security has a higher STT rate, investors can avoid investing, which can significantly reduce the demand and result in lowering the security’s price. This can end up forcing existing investors to potentially incur a loss on their investments.
Levy of Securities Transaction Tax
Securities Transaction Tax (STT) is levied on all purchases and sales of securities listed on recognised Indian stock exchanges. Charged at the moment a transaction is executed, it applies equally to equity shares and derivative contracts—futures and options. STT simplifies tax compliance by deducting the tax upfront and remitting it directly to the government, ensuring transparency and reducing capital gains underreporting. This upfront collection strengthens fiscal governance and market efficiency.
Taxable securities transaction
|
Rate of STT
|
Person responsible for paying STT
|
Value on which STT is required to be paid
|
Delivery based purchase of an equity share
|
0.1%
|
Purchaser
|
Purchase price of the equity share
|
Delivery based sale of an equity share
|
0.1%
|
Seller
|
Sale price of the equity share
|
Delivery based sale of a unit of an equity oriented mutual fund
|
0.001%
|
Seller
|
Sale price of the fund unit
|
Sale of equity share or unit of equity oriented mutual fund on a recognised exchange, other than by actual delivery (including intra day trades)
|
0.025%
|
Seller
|
Sale price of the share or fund unit
|
Derivative – sale of an option in securities
|
0.10%
|
Seller
|
Option premium
|
Derivative – sale of an option in securities when the option is exercised
|
0.125%
|
Purchaser
|
Settlement price
|
Derivative – sale of futures in securities
|
0.02%
|
Seller
|
Futures trading price
|
Sale of unit of an equity oriented ETF to the Mutual Fund
|
0.001%
|
Seller
|
Sale price of the ETF unit
|
STT is mandatory and charged to both buyers and sellers, depending on the type of transaction. The stock exchanges collect the STT at the time of the investors' transactions. For example, when an investor buys or sells shares, the broker includes STT in the transaction costs.
The government defines and adjusts the STT rates regularly. They are different for equity delivery, intraday trades, futures, options, and mutual funds. The tax is not refundable and is mandatory when buying and selling securities.
Conclusion
The Securities Transaction Tax is a tax levied on the purchase and sale of securities, such as equities, futures, options, etc, by the stock exchanges. Stock exchanges are required to deposit taxes with the Indian government within a specific timeframe. The main idea behind charging STT is to facilitate tax collection on trading activities. The STT is automatically deducted during the buying and selling of securities and is included in the transaction cost. Now that you know what is STT, you can make better investment decisions.
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