Introduced in the year 2004, the Securities Transaction Tax has been praised as one of the good fiscal measures undertaken by the government to curb tax evasion and garner more revenue from direct taxes. Wish to know more about this tax? Read on.
What is Securities Transaction Tax?
It is a direct tax levied at the time of purchase or sale of securities on the stock exchanges of India. The Securities Contract (Regulation) Act, 1956 defines securities that are taxable under STT. They would constitute the following –
- Delivery based equity shares
- Equity mutual funds
- Equity shares, equity mutual fund units and intraday traded shares
- Derivative sale of options
- Derivative sale of futures
STT is not applicable for off-market transactions or on commodity or currency transactions. Securities Transaction Tax is not applicable on GOLD ETFs, LIQUID/Gilt ETFs, and International ETFs.
The rate of STT is based on the nature of underlying security and if the transaction is a purchase or sale. STT has to be paid while buying or selling an equity share which is 0.1% of share value.
The rationale behind STT is that there were multiple tax evasions of capital gains tax and to prevent that from happening, this tax was introduced.
Treatment of STT for Income Tax purposes
STT for the purpose of income tax varies based on the nature of transactions. It is also important to note that if you are trading securities and considering the gains made as business revenue, then the STT can be deducted in the form of a business expense.
STT on Futures and Options
The transactions mostly have the purpose of investment or business. STT at the rate of 0.1% is levied on all sale transactions for futures and options. The future trades are valued at actual traded price for STT and options trade is valued at a premium.
Calculation of Securities Transaction Tax
STT is calculated on average price. The average price is calculated as follows –
Average Price = (Buy Quantity * Buy Price) + (Sell Quantity * Sell Price) / (Buy Quantity + Sell Quantity)
Securities Transaction Tax Rate in India
STT has to be paid in the following manner –
| Taxable Securities Transaction | Rate of taxation | Payable By |
| Sale of an option in securities | 0.017% | Seller |
| Sale of an option in securities, where option is exercised | 0.125% | Purchaser |
| Sale of a future in securities | 0.01% | Seller |
If the same were to be further categorized, then it can be done as follows –
| Type of Taxable Securities | Type of Transaction | Applicable STT |
| Delivery based equity shares | Purchase | 0.125% on total value |
| Equity oriented mutual funds | Redemption of units | 0.25% |
| Equity shares, equity mutual fund units and intraday traded shares | Purchase | Nil |
| Derivative sale of option | Sale | 0.017% |
| Derivative sale of futures | Sale | 0.017% |
When will STT be levied?
STT is charged as soon as the share transaction is completed. This will ensure that instances of non-payment, wrong payment, etc. are reduced to the minimum. The immediate impact of this is that it increases the cost of transaction.
Collection of Securities Transaction Tax
The collection of STT works in a manner similar to TCS and TDS. STT is to be collected by a prescribed person in case of mutual funds, recognized stock exchange, or lead merchant banker in case of initial public offer. Failure to collect or remit the collected tax will result in penal consequences and levy of interest.
Difference Between Securities Transaction Tax and Commodities Transaction Tax
Both the STT and CTT were imposed to augment the resources of the center. However, certain differences persist between the two. The differences between these two taxes are as follows –
- STT is a tax imposed on the purchase and sale of securities, whereas, CTT is a tax levied on exchange-traded non-agricultural commodity derivatives.
- STT will be levied at 0.1% to 0.25% of the value of the stock market transactions, whereas, CTT will be levied at 0.01% of the price of the trade on non-agricultural commodities.
- The purpose of the introduction of STT was to ensure that tax evasion is minimized, whereas, for CTT, the main rationale is to discourage speculation of prices of specific commodities.
Some Frequently Asked Questions
Equity, derivatives, units of equity-oriented mutual funds, and unlisted shares sold under offer for sale are all included under taxable securities.
STT will be decided by the incumbent government and the same will be modified from time to time.
It is not refundable for the assessee.
The STT for intraday transaction and delivery transaction differs.
STT cannot be claimed as part of the acquisition cost, nor will it reduce the capital gains tax liability. It can be claimed as a business expense and other taxes and charges by the trader of mutual funds.
