What is Securities Transaction Tax: Meaning, Features and Rates of STT
The securities transaction tax is a type of tax that traders have to pay when they participate in buying or selling securities listed on various stock exchanges in India.
STT is a turnover tax where the investor is liable to pay a specified tax on the consideration paid or received in a share transaction. The main aim of introducing this tax was to prohibit tax evasion on capital gains by non-disclosure of profits from the sale of financial securities.
The Securities Transaction Tax was introduced in the Budget of 2004 and later amended in 2023. It is governed by the Securities Contracts (Regulation) Act which governs all provisions of this tax. Read on to know more about STT, its features and applicability.
What Are the Features of Securities Transaction Tax in India?
Here are some features of STT in India:
- This tax is applicable to buying and selling of both futures and options contracts.
- In the case of securities transaction tax, future trades are valued at actual trading prices, whereas options trade is valued at a premium amount.
- The rate of a securities transaction tax is different for every financial security, and it is decided by the government from time to time.
- Clearing members must pay the total STT collected from all trading participants under them and deposit the same to the government within the due dates.
What Are the Different Rates of Securities Transaction Tax in India?
|Taxable security||Rate||Entity responsible for paying STT||Taxable value|
|Delivery-oriented purchase of equity shares||0.1%||Buyer||Total value at which one buys equity shares.|
|Delivery-oriented sale of equity shares||0.1%||Seller||Total value at which equity shares are sold.|
|Sale of delivery-oriented mutual funds units||0.001%||Seller||Sale price of mutual fund units.|
|Sale of equity shares or mutual fund units except for actual transfer or delivery of these units and Intraday trading||0.025%||Seller||Price at which equity shares or units of mutual funds are sold.|
|Derivatives-based sale of option contracts||0.017%||Seller||Option premium|
|Sale of options contracts in which traders opt to exercise these options contracts||0.125%||Buyer||Settlement price|
|Selling of future securities||0.01%||Seller||The trading price of future contracts|
|Sale of units of exchange-traded funds||0.001%||Seller||Selling price of these mutual fund units|
|Selling of unlisted shares under OFS which subsequently gets listed on stock exchanges||0.2%||Seller||Selling price of such shares|
Where Is Securities Transaction Tax Applicable?
The securities transaction tax is applicable on the following securities:
- Bonds, debentures, shares and any other marketable scrip incorporated by a company or a body corporate.
- Derivative contracts
- Any unit of securities issued by a collective investment scheme for investors.
- Any security defined in Section 2(zg) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002.
- Equity-oriented securities of the government of India.
- Equity-oriented units of mutual funds.
- Securitised debt instruments
- Rights or interest in securities
- In case of off-market transactions, STT is not applicable.
When Is Securities Transaction Tax Levied?
Entities have to pay securities transaction tax when they undertake buying and selling of certain securities on a recognised stock exchange. It is applicable to the trading of equity shares and derivative contracts, i.e. futures and options contracts.
STT or securities transaction tax works in the same way as Tax Collected at Source or TCS. It is a direct tax which is applicable when an individual undertakes to buy or sell certain taxable securities on any recognised stock exchange in India.
This tax must be collected by different entities like brokerages in case of equity instruments, mutual fund houses in case of trading of mutual fund units and merchant bankers in case of an IPO or OFS.
All responsible entities must deposit STT with the government on or before the 7th of every month. In case they miss depositing the tax amount with the government within the due dates, they will be liable for penal consequences.
The government introduced this tax as a part of its anti-tax evasion measures in the financial markets. Market participants were evading taxes on capital gains by showing fictitious losses, thereby causing a significant hit to the state exchequer. This tax also helps the Central Government to realise the actual potential of taxing the stock markets.
How to Calculate Securities Transaction Tax?
Below is a simple example to help you understand how to calculate the securities transaction tax.
Suppose Mr A is a trader who has purchased 100 shares of Company ABC at the rate of ₹600 per share. Now, he decides to sell these shares at ₹750 towards the end of the trading session.
As this is an intraday trade, STT is applicable on such transactions at the rate of 0.025%. The amount of STT on such transactions is as follows:
Securities Transaction Tax = STT Percentage X Number of Shares X Share Selling Price
= 0.025% X 100 X 750 = ₹18.75