There are many charges that are imposed on investors while trading securities such as brokerage charges, turnover fees, service tax, stamp duty. Securities Transaction Tax (STT) is one such charge.

How it began?

 

When people started evading tax on capital gains by not declaring their profits on the sale of stocks, the Finance Act, way back in 2004, introduced a tax called the STT as a means of clean and efficient way of collecting taxes from financial market transactions. Thus, STT came into being as a way of realising the actual potential of taxing the stock markets. So, while long-term capital gains (LTCG) tax was exempted, STT was introduced to make sure there was no tax evasion. But then, LTCG too made a comeback in 2019. 

 

Overview

 

STT is a kind of financial transaction tax which is similar to tax collected at source (TCS). STT is a direct tax levied on every purchase and sale of securities that are listed on the recognized stock exchanges in India. STT is governed by Securities Transaction Tax Act (STT Act) and STT Act has specifically listed down various taxable securities transaction i.e., transaction on which STT is leviable.

 

Taxable securities include equity, derivatives, unit of equity oriented mutual fund. It also includes unlisted shares sold under an offer for sale to the public included in initial public offering (IPO) and where such shares are subsequently listed in stock exchanges. STT is an amount to be paid over and above transaction value and hence, increases transaction value.

 

In essence, STT is an indirect tax and is imposed on a broker rather than the investor/trader directly. The broker, in turn, collects it from its clients and deposits it with the government. An investor or trader has to pay the tax no matter whether she makes a profit or not.

 

Securities Transaction Tax: Applicability

 

An STT charge is a charge or rate that is applied to different securities with the purchase and sale of each security. The rates are decided by the government and can be subject to change from time to time if needed. This table provides the detailed STT charges applied to different securities.

 

 

How to Calculate Securities Transaction Tax?

 

Intra-day Trading – When the securities are bought and sold on the same day, it is called intra-day trading. It is charged only on the sell side of the transaction at the rate of 0.025%.

 

Example: A trader buys 100 shares of Reliance Industries Limited on 15th November 2022 for Rs2,000 each at 10:00 AM and sells them off at Rs2,200 at 3:30 PM on the same day. Here, STT will be Rs55 calculated as (Rs2,200 x 100 x 0.025% = Rs55.00)

 

Delivery Trades – In this scenario, STT is charged on both sides when a trader buys or sells a particular equity share at the rate of 0.1%.

 

Example: A trader buys 100 shares of Reliance Industries Limited on 15th November 2022 for Rs2,000 each and sells them off at Rs2,200 on 18th November 2022. Here, STT will be applied on both the buy and sell sides at the rate of 0.1%. On the buy side, STT will be Rs200 calculated as (Rs2,000 x 100 x 0.1% = Rs200.00), and on the sell side, STT will be Rs220 calculated as (Rs2,200 x 100 x 0.1% = Rs220.00). So, the total STT will be Rs420 calculated as (Rs200 + Rs220). 

 

Options –  STT will be applied on the sell side of the transaction at the rate of 0.05% when the option is not exercised and at the rate of 0.125% when the option is exercised. 

 

Example - A trader sells one lot of calls on the Sensex at a strike price of Rs20,000 at the rate of Rs750 each. Hence, STT charges will be Rs18.75 calculated as (50 (Lot size of Sensex) x Rs750 x 0.05%).

 

Futures – In this case, STT will be applied on the sell side of the transaction whether it is intra-day or positional trading. It is charged at the rate of 0.010%.

 

Example - A trader sells one lot of Sensex on 15 November 2022 at 20,000. His total volume comes to 20,000 x 50 = Rs10,00,000. On the same, he has to pay Rs100 as STT calculated as (Rs10,00,000 x 0.010% = Rs100.00).

 

As we all know tax evasion is illegal in India, security transaction tax helps in curbing evasion and will therefore help in increasing transparency in the system. Though it increases the cost of transactions for the traders but at the same time simplifies the process of capital gain reporting and tax collection.

 

Is security transaction tax compulsory?

Yes, STT is compulsory to be collected by a recognized stock exchange or by the prescribed person in the case of a mutual fund or the lead merchant banker in the case of an initial public offer. It has to be paid to the government on or before the 7th of the following month failure to attract interest or penal consequences on it.

 

What is the security transaction tax in mutual funds?

In the case of mutual funds, STT is applicable only to equity-related mutual funds. There is no STT when it comes to debt-oriented mutual funds.

 

Can I deduct STT from capital gains?

No, STT is not subject to any deduction from capital gains. It will not reduce capital gains tax liability. The only exception is when you are trading shares professionally and can claim a deduction under income tax.