Understanding Securities Transaction Tax in India

In India, a Securities Transaction Tax (STT) is levied on the sale and purchase of securities. This tax was introduced to discourage speculative trading and generate revenue for the government.

The STT is a flat rate of 0.01% on the transaction value, which is a significant reduction from the earlier rate of 0.125%. This reduction aims to encourage trading and boost the economy.

The STT is applicable on various types of securities, including shares, securities, and derivatives. This includes equity shares, debentures, warrants, and convertible notes.

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Securities Transaction Tax, or STT, is a direct tax levied on every purchase and sale of securities listed on Indian stock exchanges.

STT is similar to tax collected at source (TCS) and is governed by the Securities Transaction Tax Act (STT Act). The STT Act lists down various taxable securities transactions, including equity, derivatives, and unit of equity-oriented mutual fund.

These taxable securities also include unlisted shares sold under an offer for sale to the public included in IPO and where such shares are subsequently listed in stock exchanges.

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STT is an amount to be paid over and above the transaction value, increasing the overall transaction value.

The STT rate will be decided by the Government and can be modified from time to time if necessary.

STT 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.

In case the above persons fail to collect the taxes, they are still obliged to discharge an equivalent amount of tax to the credit of the Central Government within the 7th of the following month.

Failure to collect or remit whatever has been collected will result in a levy of interest and penal consequences too.

The Indian government replaced an earlier tax called ‘Stamp duty’ with Securities Transaction Tax (STT) in 2004 to improve the taxation system.

STT is levied on both buyers and sellers, and the tax rate varies depending on the type of security and whether you're buying or selling.

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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.

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.

If you buy 200 shares of a company at Rs. 500 per share, the total transaction value is Rs. 1,00,000, and with an STT rate of 0.1%, you would pay Rs. 100 as STT.

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Securities Transaction Tax (STT) is charged on various types of securities, including equity intraday, equity delivery, options, and futures.

For equity intraday trades, STT is 0.025% (₹25 per lakh) on the sell side, regardless of whether you're buying or selling.

Equity delivery trades, on the other hand, incur a STT of 0.1% (₹100 per lakh) on both the buy and sell side. This means you'll need to calculate the average price of your trades using the formula: Average price = (Buy Qty*Buy Price) + (Sell Qty*Sell Price) / (Buy Qty+Sell Qty).

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Options trades have a STT of 0.125% of the intrinsic value on options that are bought and exercised. Options that are shorted, however, incur a STT of 0.1% of the premium.

Futures trades have a STT of 0.02% (₹20 per lakh) on the sell side, and 0.0125% (₹12.5 per lakh) on the sell side for old charges.

Here's a breakdown of the STT charges for different types of securities:

Securities Transaction Tax (STT) rates vary based on the type of transaction and the security involved. The tax is levied on the purchaser or seller, depending on the transaction type.

For delivery-based purchase of equity shares, the STT rate is 0.1% and the person responsible for paying STT is the purchaser. The value on which STT is required to be paid is the price at which the equity share is purchased.

Delivery-based sales of equity shares also attract a 0.1% STT, which is paid by the seller. The value on which STT is paid is the price at which the equity share is sold.

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Intraday or non-delivery sales of equity shares have a lower STT rate of 0.025%, which is also paid by the seller.

STT rates for different securities can be summarized in the table below:

STT prevents tax evasion by allowing the government to track transactions on the stock exchange, making it easier to curb tax evasion. This helps maintain a fair and transparent market.

The tax is collected directly at the time of the trade, reducing the chances of underreporting or evading taxes. This simplifies the process of tax reporting and ensures better compliance with tax regulations.

STT discourages speculative trading by adding an extra cost to sell or purchase transactions on securities. As a result, traders decrease speculative trading, leading to less market volatility and benefiting investors.

Long-term investors are primarily affected by STT on their sale of equity shares and mutual funds. However, they are exempt from long-term capital gains tax if the gains exceed ₹ 1 lakh in a financial year.

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The intraday STT rate of 0.025% on sell-side trades increases trading costs for active traders, which can significantly erode profits. This affects traders who frequently buy and sell securities, such as those involved in intraday trading or derivatives trading.

STT applies to both short-term and long-term capital gains, but the rates differ. For short-term capital gains, if securities are sold within 12 months, the gains are taxed at 15%, in addition to STT.

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In India, Securities Transaction Tax (STT) is a direct tax levied by the Government of India on the purchase and sale of securities listed on recognised stock exchanges. This tax was introduced under the Finance Act of 2004 to simplify tax collection and curb tax evasion.

STT operates similarly to Tax Deducted at Source (TDS), where the tax 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.

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The rate of STT varies depending on the type of transaction. For example, the tax rate for delivery-based purchase of equity share is 0.1%, while for delivery-based sale of an equity share, it is also 0.1%. However, for intra-day traded shares, the tax rate is 0.025%.

Here is a summary of the STT rates for various transactions:

It's worth noting that for physical delivery of derivatives, the stock exchanges have levied an STT of 0.1%, which is almost 10 times the rate for derivative contracts settled in cash. However, the Central Board of Direct Taxes (CBDT) has clarified that the STT rate for physical delivery of derivatives is the same as for delivery-based equity transactions.

On Which Securities is STT Applied?

STT is levied on the purchase and sale of securities listed on recognised stock exchanges like the National Stock Exchange (NSE) and Bombay Stock Exchange (BSE).

The tax applies to stocks, bonds, and mutual funds.

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.

Securities Transaction Tax (STT) in India is a direct tax levied on the purchase and sale of securities listed on recognised stock exchanges.

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.

STT is levied on various types of securities transactions, including delivery-based purchase and sale of equity shares, units of equity-oriented mutual funds, and derivatives.

The rate of STT varies depending on the type of transaction, ranging from 0.001% to 0.125%. For example, delivery-based purchase of equity shares is subject to a 0.1% STT, while sale of units of equity-oriented mutual funds is subject to a 0.001% STT.

Here is a summary of the STT rates for different types of transactions:

In some cases, the stock exchanges may levy a different STT rate for physical delivery of derivatives, which can be up to 10 times the rate for cash-settled transactions. However, the Central Board of Direct Taxes (CBDT) has clarified that the STT rate for physical delivery of derivatives should be the same as for delivery-based equity transactions.

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Equity intraday trading involves buying and selling shares within the same trading day. This can result in a lower average price compared to buying and holding shares.

To illustrate this, let's consider an example: buying 500 shares at ₹100 each and selling them at ₹105 each. The average price is calculated as (500 * ₹100) + (500 * ₹105) / 1000, which equals ₹102.5.

STT (Securities Transaction Tax) is charged on the sell side, and the amount is calculated as a percentage of the average price. In this case, the STT is 500 (shares sold) * 102.5 (average price) * 0.025%, which equals ₹13 (rounded off to the nearest rupee).

Here's a breakdown of the STT calculation:

Keep in mind that STT is charged on the sell side, which is why it's calculated based on the average price of the sold shares.

Income from securities transactions can be taxed in different ways depending on whether it's considered an investment or business activity.

For transactions up to 31 March 2018, any capital gain on the sale of shares or equity-oriented mutual fund units (EOMF) subject to STT is taxed at a beneficial or nil rate.

Long-term capital gains, which occur when shares or EOMF are held for more than 12 months, are exempt from tax. However, short-term capital gains are taxed at a concessional rate of 15% until 23rd July 2024, after which the rate increased to 20%.

Gains accrued till 31 January 2018 are grandfathered, meaning the cost of acquisition of shares or EOMF acquired before 1 February 2018 will be replaced by fair market value as of 31st January 2018.

If a person is trading in securities and offering income/loss from such trading as business income, STT paid is allowed to be deducted as business expense.

Here's a summary of the tax rates on short-term capital gains:

Derivative contracts are generally settled in cash, but for certain stocks, contracts are settled by physical delivery of shares as against cash.

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STT is levied on these physical delivery transactions, but the rate is unclear. The stock exchanges have levied an STT of 0.1 per cent, which is almost 10 times the rate for cash-settled derivative contracts.

The Bombay High Court has sought the comments of the Central Board of Direct Taxes (CBDT) on this matter, and the CBDT has clarified that the STT rate as applicable to delivery-based equity transactions would apply to physical delivery of derivatives.

For example, if you sell 1 Lot of XYZ futures contracts at ₹7,50,000, the STT (on sell side) would be 0.02% of ₹7,50,000, which is ₹150.

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Derivative contracts are generally settled in cash, but there's an exception for 46 stocks listed by SEBI, where derivative contracts would be settled by physical delivery of shares.

The stock exchanges initially levied an STT of 0.1 per cent on these transactions, which is almost 10 times the rate for cash-settled derivative contracts.

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This disparity led to a petition by the Association of National Exchange Members of India (ANMI) against the stock exchanges, which was then referred to the Central Board of Direct Taxes (CBDT) for clarification.

The CBDT clarified that where a derivative contract is settled by physical delivery of shares, it would be similar to a transaction in equity shares, so the STT rate applicable to delivery-based equity transactions would apply.

The CBDT's clarification was issued in response to the High Court seeking its comments on the matter.

Futures trading involves several charges, including the securities transaction tax (STT). STT is levied on the sell side at a rate of 0.02% of the contract value.

The contract value for 1 lot of XYZ futures contracts is ₹7,50,000. This results in an STT of ₹150.

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