Securities Transaction Tax- All you need to know!

Securities Transaction Tax- All you need to know!

In India, many people tried to evade the taxes levied on their profits in stock trading. To ensure that every trader pays their taxes, the government came up with Securities Transaction Tax or STT in 2004.

If you’re wondering what STT is, its features and when it is levied then you’re on the right spot! In this article, we’ll be covering all aspects of this tax to educate you about it (so that you don’t become one of those tax evaders!)

Securities Transaction Tax is a direct tax. It is sanctioned by the central government on both purchase and selling of securities. These securities may include options, equities and futures.

STT is exclusively applicable to transactions settled in the domestic stock exchange. Also, STT covers only transactions completed through accepted stock exchanges in the country. Moreover, this tax excludes off-market transactions.

The STT Act of 2004 is responsible for governing this policy. This taxation policy came into existence on 1st October 2004 and since then every trader/investor is obliged to pay STT. It has simplified the taxation process in Capital Markets of India for trading/investing.

That must’ve cleared the concept of STT to you. Let's check some of the features of STT to understand it more proficiently!

Since STT was enforced as a means to efficiently collect taxes from the financial market, it has some distinguishing features.

The following are the features of STT:

  • It is crucial to note that STT is levied exclusively on sell transactions of options and futures.
  • Since it is applied only to recognised stock exchanges, not individual members, there is a criterion to pay this tax. The clearing member must pay the total of all the STT taxes of the trading members under him.
  • STT on futures is valued on the actual traded price. However, in terms of options, premium traded value is calculated.
  • The tax rates of STT depends upon the type of security. It also depends on sales or purchases.
  • Also, the Central Government of India is responsible for deciding the rate of taxation for STT.

Those were some of the distinguishing features of Securities Transaction Taxes. Now, let’s move on to check some examples and comprehend STT in a better way.

STT is levied every time securities are purchased or sold on an accepted stock exchange. The STT act proclaims to tax all the transactions carried out involving equities and equity derivatives.

To understand the taxation of STT, let’s consider a simple example.

Suppose, there is a ‘Mr. X’ is an investor in the Indian Equity Market. He purchased 1000 shares on 12th January for 50 Rs. each in the morning. He then sold his 1000 shares at 60 Rs. each in the evening. As per the intraday equity trading, the STT levied on this transaction will be 0.025%. (Sounds like an 11th-grade maths sum, isn’t it?)

Let’s calculate the STT on this transaction quickly!
STT= 0.025% x 60 x 1000 = 15 Rs.
(Seems like the 11th-grade sum helped us to easily understand the taxation of STT!)
Similarly, STT for futures and options are 0.01% and 0.017% respectively.
Also, it's crucial to know the securities on which STT are applicable.
According to the Securities Contract Act of 1956, STT is applicable for the following types of securities.

  • It is levied on Equity Mutual Funds.
  • Shares, stocks, bonds and debentures.
  • Government securities are equity in nature.
  • Securitized Debt instruments.
  • Debenture stock and marketed securities of the corporate body.
  • Rights and interests of securities, etc.

Now, after understanding how STT is levied, let's move on to understand when STT is levied!

STT is applicable every time during the purchase and sale of equities listed on an accepted stock market.

The STT Act proclaimed that every stock exchange involving equity and equity derivatives ought to pay STT.

Securities Transaction Tax is applicable the very moment a transaction occurs in the share market. When STT is charged instantly after a transaction in the stock market, the problems of non-payment/wrong payment etcetera get reduced to the minimum extent. Thus, the process of taxation of STT is quick, effective and transparent.

STT is applicable on all transactions in the stock market and it is unavoidable. Also, you can get an STT certificate at the end of a financial year. This STT certificate can be helpful while claiming a deduction from Short-Term Capital Gains (STCG).

We hope our effort to educate you about the Securities Transaction Tax has been successful.

(This article was solely meant for educational purposes. It doesn’t by any means try to provide financial advice to our readers.)

  • Is STT an allowable expense?
  • No, STT does not come under allowable expenses.

  • How is Securities Transaction Tax calculated?
  • STT can be calculated as follows:
    STT Rate in Percentage x Price of each share bought/sold x Total no. of shares bought/sold.

  • Is a securities transaction tax a direct tax?
  • Certainly, STT is a direct tax collected by the central government of India. STT is directly levied during the transaction of equities in the stock market.

  • When is securities transaction tax not applicable?
  • Securities Transaction Tax is not applicable during off-market transactions. Moreover, buyers do not have to pay tax while purchasing an equity-oriented mutual fund.

  • When is a securities transaction tax applicable?
  • Whenever you purchase or sell securities like share, bonds, equities listed on a recognised stock exchange, you’re liable to pay STT.

  • What is the rate of securities transaction tax on futures and options?
  • The rate of STT during the sale of options or futures is 0.017% and 0.01% respectively.

  • What is the rate of STT on equity shares?
  • There is no STT levied on equity shares and equity mutual funds. However, 0.1% of STT applies to the total value of the delivery based sale and purchase equity shares. In case of purchase, the buyer will pay the tax and in case of a sale, the seller will pay the tax.

  • What is STT on intraday trading?
  • 0.025% of STT is levied during the intraday sale of shares and it has to be paid by the seller.