Securities Transaction Tax: What It Is and How It Is Levied?

Securities Transaction Tax (STT) is a direct tax that is imposed on the purchase or sale of mutual funds, stocks, and derivatives listed on the Indian stock exchanges. This tax is introduced to regulate and generate income from the trading of investments. Additionally, provide speculative trading and certify a fair contribution of market participants in the Indian economy. Knowing about STT and how it is levied gives an overview of its impact on the traders, investors, and the wider financial market.

Being an investor or trader in the stock market in India, do you also want to know about STT? If yes, then you are on the right page. Here in this blog, you will get all the information about the securities transaction tax. So read on and know everything about it. 

What is Securities Transaction Tax (STT)?

Like the tax collected at source (TCS), the securities transaction tax (STT) is also one of the types of financial transaction tax. This tax is imposed on the sale and purchase of securities listed on the stock exchange market in India. STT is controlled by the Securities Transaction Tax Act (STT Act) and has specifically mentioned the securities on which this tax is imposed.

The securities that are taxable under this are units of equity-oriented mutual funds, equity, and derivatives. Additionally, it also involves the unlisted shares that are under sale offer sold to the public before being listed on the stock exchanges. Since this tax is directly imposed on the transaction amount, it increases the purchasing and selling costs of securities. 

The STT rates are periodically determined by the government. Depending on the transaction type, either the seller or the buyer is accountable for paying STT charges. The STT is payable to the government before or on the 7th of the following month. Moreover, if an individual fails to collect or remit the STT, it results in both penal consequences and the levy of interest. 

This was all about the securities transaction tax (STT). Moving further, let's know the key features of it. 

Key Features of STT

Securities Transaction Tax (STT) is a direct tax that is easy to calculate and impose. Some of the most distinguishing features of STT are as follows:

• Applicability: STT applies to equity-oriented mutual funds, equity shares, and derivatives (futures and options).
• Collection at Source: It is deducted at the very first movement when you purchase or sell any securities and transferred directly to the government. 
• Long-Term Holding Exemption: Both long and short-term gains include STT. However, long-term gains less than the stated threshold may be exempt under this.
• Excludes Off-Market Trades: Under STT, off-market or private market deals are not included. Only trades done on a recognised stock exchange market in India are included in STT. 
• Variable Rates: According to the traded instrument, periodically, the government revised the tax rates. 

These are some of the key features of STT. Moving ahead, let's know the securities to which this is applicable. 

On What Securities Is STT Applicable?

There is no definition mentioned of 'securities' in the Securities Transaction Tax. Considering this, it has borrowed the definition of it from the Securities Contract (Regulation) Act, 1956. According to that Act, 'securities' are those assets on which STT is imposed. These consist of the following:

• Debenture stock, bonds, scraps, stock shares, or any other securities that have the same nature as this or are marketed.
• Any securities with an equity nature stated by the government.
• Any units or derivatives that are generated by the investment schemes.
• Securities consist of interests and personal rights.
• Debt instruments are mentioned under security.

So, from the above explanation, it is clear that under the STT, 'securities' is a broad term. Additionally, when it comes to imposed tax, it includes all the securities listed on the stock exchange market of India.

This was all about the securities on which STT is applicable. Moving further, let's know levy of STT in India. 

Levy of Securities Transaction Tax

The Securities Transaction Tax is levied on the purchase or sale of securities listed on stock exchanges. The rate of STT depends on the underlying asset type in its volume, and the question. The government is liable to fix the rates, and from time to time, these rates are revised by them. Additionally, based on the transacted financial instrument, the tax may apply to both seller and buyer or buyer and seller. Here are the different transaction rates:

The securities transaction tax is mandatory, and depending on the transaction type, it is charged to both sellers and buyers. It is collected during the transaction of the investor. For instance, when an individual sells or purchases shares, in the transaction costs the broker includes the STT. 

This was all about the levy of STT. Moving ahead, now let's know how it is counted on the physical delivery of derivatives. 

How STT Is Counted on Physical Delivery of Derivatives?

Generally, the derivatives contracts are settled in cash. This means that instead of the physical delivery of stocks, the profits from them are given and received by both the contracting parties. As stated in the above table, on these transactions, 0.001% STT is imposed. However, on 11 April 2018, the Central Board of Direct Taxes (CBDT), in its circular, listed 48 stocks. In that contract, the CBDT mentioned that the settlement of derivatives will only be done through the physical delivery of shares against cash. Furthermore, the circular did not state that the STT rate applies to these transactions.

Considering this, on such transactions, the stock exchanges began to impose 0.1% STT, which is 10% more than the tax imposed on the cash settlement of the derivative contracts. In outcome of this, the Association of National Exchange Members of India (ANMI) filed a petition against the stock exchange in the Bombay High Court to address the concern of increased tax on physical delivery of derivatives.

In this regard, the High Court asked for the opinion of the CBDT. In response to that, on 27 August 2018, the CBDT provided a clarification stating that if a derivative contract is settled through the physical delivery of shares, then that transaction will be considered similar to the equity share transaction, where the settlement of the contract is done by actual delivery of shares. Hence, on such derivative transactions, the same STT rate will be applicable as in the delivery-based equity transactions. 

This is how STT is counted on the physical delivery of derivatives. Moving further, let's read about STT and income tax. 

Securities Transaction Tax and Income Tax

As mentioned above, all the securities listed on the stock exchanges are taxed under STT. However, the STT applicability for income tax purposes varies according to the transaction type, either for investment or trading, or for producing business revenue. These are as follows:

Capital Gains

When individuals, whether self-employed or employed for financial gains, invest in securities, they are required to pay STT. The profit they earned from these is called capital gains, which are further divided into short-term capital gains (STCG) and long-term capital gains (LTCG), calculated on the duration of holding securities. Until 31 March 2018, LTCG on equity-oriented mutual funds (EMOF) and shares were exempt from STT, while on STCG, 15% tax was charged.

However, as mentioned in the Budget 2024, from 23 July 2024, the STT of STCG has increased, i.e., 20%. Additionally, now on LTCG, also at a 12.5% tax rate will be charged. Furthermore, before 31 January 2018, the capital gains accrued are grandfathered, using the market value of 31 January 2018 as the acquisition cost. 

Business Income

Companies are also liable to pay STT that are into securities transactions to produce business income. Under section 36 of the Income Tax Act, 1961, they can claim the tax deduction on their total paid STT. In the scenario of business, the STT is considered an expense of the business and is eligible for tax deduction under the Income Tax Act. 

This was all about STT and income tax. Now, moving ahead, let's know how STT works. 

How Does Securities Transaction Tax Work?

The Securities Transaction Tax works by imposing the tax on certain securities, like shares, when you sell or buy them. It is levied to certify for the Indian stock services that investors use, they pay the tax on them, and provide the government with an income with more taxes. In 2004, the 'Stamp Duty' tax was replaced by the government of India with STT, as it was offering a better taxation system.

As stated above, the securities transaction tax is levied on both sellers and buyers, and depending on the security type and whether you are selling or buying the security, the tax rate varies. For instance, when you sell or purchase equity shares at their transaction value, 0.1% STT is applied. The stock exchange automatically deducts this tax and pays it to the government. 

As a result, the deduction of STT is quick, effective, and transparent, and as soon as the transaction is made, it is deducted. Additionally, it avoids incidents like incorrect payment, non-payment, and so on. However, one drawback of it is that STT increases the transaction cost.

It is how STT works in India. Furthermore, let's know the impact of it on traders and investors.

Impact of STT on Traders and Investors

In the following manner, the securities transaction tax impacts the traders and investors:

• Increased Transaction Cost: As STT is the additional price imposed on the sale and purchase of securities, it increases the price of trading securities. Additionally, when the transaction value is large, the cost of STT becomes higher, which further impacts the profitability of the investors.
• Shift in Trading Strategies: Considering the increased transaction cost, the trading strategies of investors may change to get the benefits of securities where they get low STT rates.
• Reduced Liquidity: Sometimes, the market liquidity is also reduced by STT. It is because some investors, instead of opting for securities with a higher STT rate, choose long-term investments, even when they want to earn short-term returns.
• Effect on Profitability: Regardless, whether the investment is profitable or not, the STT is applied to the securities. It decreases the capital gains from the trades and increases the losses that occur from the unsuccessful ones. This further impacts the portfolio performance.
• Security Pricing: If the STT rate of the security is higher, individuals can avoid investing in that, and significantly, the demand for it is reduced, and the outcome is a lower price of the security. This further forces the existing investors to face a loss on their investments.

These are some of the impacts of STT on traders and investors. Now, let's know the benefits of STT. 

Benefits of Securities Transaction Tax 

Here are the benefits of the securities transaction tax:

• Avoid Tax Evasion: As mentioned above, the securities transaction tax is like the tax collected at source (TCS). It helps the government in tracking the transactions of the stock exchange market of India and avoiding tax evasion.
• Discourage Speculative Trading: As STT is charged on the purchase and sale of transaction securities, many people avoid speculative trading because of the increased STT price. This further results in less volatility of the market and is impactful for investors. 

These are some of the benefits of STT that both investors and the government of India get from its implication. Moving ahead, let's better understand the implications of STT through an example. 

Illustration

Suppose Mr. A is a trader and he bought 5000 shares worth INR 10,000 at Rs. 20 per share. Now, within a period of 12 months, he sells those shares at Rs. 30 per share. In case Mr. A sells the shares on the same day on which he bought them, the intraday rate of STT will be 0.025%, i.e., 

STT = 0.025% * 30 * 5000 = INR 37.5

Like this, for futures and options, the appropriate rate of STT is 0.01%. If Mr. A at INR 5000 purchases 5 lots of Nifty futures and sells them at INR 5,010, this is how STT will be calculated:

STT = 0.01% * 5010 * 50* 5 = INR 125.25.

This is how STT is applied to the transaction of securities. 

Final Thoughts

For every trader and investor in India, knowing about how the securities transaction tax (STT) is imposed is vital. It helps them in better planning and choosing the right investment option. After reading the above blog, you now know what STT is, and surely it will help you in taking the right investment decision. Furthermore, if you need more information about STT or how it is applied, consult taking help from professionals like Savetaxs. We have a team of experts who have years of experience in the taxation field and provide you with the correct guidance. So, do consider us if you need any help in income tax-related topics or while filing the ITR. 

*Note: This guide is for informational purposes only. The views expressed in this guide are personal and do not constitute the views of Savetaxs. Savetaxs or the author will not be responsible for any direct or indirect loss incurred by the reader for taking any decision based on the information or the contents. It is advisable to consult with either a Chartered Accountant (CA) or a professional Company Secretary (CS) from the Savetaxs team, as they are familiar with the current regulations and help you make accurate decisions and maintain accuracy throughout the whole process.