What is STT? The Securities Transaction Tax (STT) is designed to generate revenue from securities trading. STT is charged on the securities’ transaction value traded on the stock exchanges. The STT was introduced to increase tax compliance and simplify the taxation of securities transactions.
Introduced in 2004, STT was designed to curb speculative trading and generate revenue from the Indian financial market. It is a direct tax charged to various financial instruments, including derivatives, shares, and equity-oriented mutual funds. It is important to note that STT is paid over and above transaction value and hence, increases transaction value.
Here is an example – If 200 shares of a company at ₹100 per share are sold in the market, the transaction value is ₹20,000. If the STT rate for equity delivery is 0.1%, an STT of ₹20 is to be paid.
What are the features of STT?
Let us understand more about STT and its features below:
1. Direct Tax: STT is a direct tax levied directly on the investor’s transactions.
2. Transaction-Based: The tax is applied to every sale of securities, including stocks, derivatives and equity-oriented mutual funds.
3. Uniform Rate: Although different securities have varying rates, the tax is consistently applied to all investors.
4. Collected at Source: The stock exchanges handle the collection of STT, ensuring efficient and seamless processing on behalf of the government.
5. Revenue Generation: STT contributes significantly to government revenue through its widespread application.
6. Discourages Speculation: By taxing each transaction, STT aims to curb excessive market speculation and trading volatility.
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How is STT levied?
Securities Transaction Tax is applicable every time a share listed on the Indian stock market is bought or sold. It is applicable the very moment a transaction occurs on the exchanges. As the STT is charged instantly after a transaction in the stock market, the problems of non-payment or wrong payment get reduced to a minimum extent. Thus, the process of taxation of Securities Transaction Tax is quick, effective, and transparent. You can get an STT certificate at the end of a financial year.
How is STT calculated?
STT is governed by the Securities Transaction Tax Act (STT Act), which outlines various taxable securities transactions, i.e. transactions on which STT is leviable. The STT Act has also provided the value of the transactions on which STT is required to be paid and the person responsible for paying Securities Transaction Tax, i.e., either buyer or seller. However, the rate of Securities Transaction Tax will be decided by the Government and modified from time to time if necessary.
Refer to the table below for the latest rates:
| S.No. | TAXABLE SECURITIES TRANSACTION | RATES | PAYABLE BY | Value on which STT is payable |
|---|---|---|---|---|
| 1a | Purchase of an equity share in a company or a unit of a business trust | 0.1% | Purchaser | Value of taxable securities transaction based on the volume-weighted average price |
| 1b | Purchase of a unit of an equity-oriented fund | NIL | NA | NA |
| 2a | Sale of an equity share in a company or a unit of a business trust | 0.1% | Seller | Value of taxable securities transaction based on the volume weighted average price |
| 2b | Sale of a unit of an equity-oriented fund | 0.001% | Seller | |
| 3 | Sale of an equity share in a company or a unit of an equity-oriented fund or a unit of a business trust | 0.025% | Seller | |
| 4a | Sale of an option in securities | 0.0625% (0.1% from 01 Oct 2024) | Seller | Option Premium |
| 4b | Sale of an option in securities, where the option is exercised | 0.125% | Purchaser | Intrinsic value |
| 4c | Sale of futures in securities | 0.0125% (0.2% from 01 Oct 2024) | Seller | Price at which such futures are traded. |
Securities Transaction Tax is charged on both buy and sell transactions. Here’s how the average price is calculated:
Average price = (Buy Qty * Buy Price) + (Sell Qty * Sell Price) / (Buy Qty + Sell Qty)
To see the calculation of Securities Transaction Tax in intraday, assume the following transactions:
- 1000 shares bought at ₹100
- 1000 shares sold at ₹105
- 500 shares bought at ₹110 again
Calculating STT – Example
Calculating average price:
Average price = ((1000 * 100) + (1000 * 105) + (500 * 110)) / (1000 + 1000 + 500) = ₹104
- Securities Transaction Tax for intraday= 1000 (sell qty) * 104 * 0.025% (STT charge) = ₹26
- Securities Transaction Tax for delivery= 500 * 104 * 0.1% = ₹52
How is STT collected?
Securities Transaction Tax is required to be collected by a recognised stock exchange or by the prescribed person in the case of every mutual fund or the lead merchant banker in the case of an initial public offer, as the case may be, at the time of the transaction and subsequently payable to the government. Securities Transaction Tax is automatically deducted from the trading account and this is then reflected in the transaction statement. It should be noted that this tax paid is irrespective of the fact if one makes a profit or loss from the sale of shares. It is similar to the Tax Deducted at Source (TDS).
The STT collected is required to be remitted to the Government by the 7th of the following month. In any case the responsible parties fail to collect the tax, they are still obligated to pay an equivalent amount to the Central Government by the 7th of the subsequent month. However, non-compliance with these requirements, including failure to collect or remit the tax, can result in interest charges and additional penalties.
How does STT impact investors?
Securities Transaction Tax impacts the overall cost of trading and can affect net returns, especially for high-frequency trades. It is essential for investors to factor in STT when calculating their trading costs and returns.
Individuals who earn profit from LTCG or STCG, cannot claim STT as an expense. However, when you trade in securities and claim the income/loss from such trading as business income, you are allowed to deduct the STT paid as a business expense.
However, if you trade in securities and report the income/loss from such trading as business income, you can deduct the STT paid as a business expense.
Wrapping up!
Just like investing and investment products, it is important to know about the taxes involved in them. Therefore, investors investing in any kind of securities like stocks, bonds, mutual funds, and more should be aware of STT and other taxes involved in investing. This would enable the investors to calculate the real value of their investments and redemptions.
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