It is quite reasonable for taxpayers to try to reduce the tax burden on their income from an investment. Following higher reporting of tax evasion, Government of India under the Finance Act, introduced Securities Transaction Tax (STT) in 2004. It is a new form of tax that levied on purchase and sales of securities.
If you are a new investor, it may help you learn the various taxes apply to equity transactions and dealing with managing your tax returns better. How? First, you can avoid paying excess if you know how to report capital gains in your tax return. And secondly, you can avoid ending up on the wrong end with the authorities. Tax evasion is a criminal offence, and so, you must maintain clarity with all your income reporting. In this article, we will discuss security transaction tax – how it applies, collection method, and income tax implications. So, bear with us!
What Is The Security Transaction Tax?
The security transaction tax is a tax levied on capital gains arising from dealing with securities such as equities, options, and futures. Since security transaction tax is a big name, henceforth we will refer to it as STT or STT tax.
So, STT tax is a direct tax levied and collected by the central government on every dealing of equities, options, and futures in the domestic market. As mentioned above, it was introduced in 2004 as an improved method to simplify capital gain reporting and tax collection to reduce tax pilferage. Its features are similar to TDS (tax deducted at source), levied when a transaction takes place, that is when you sell or purchase a share.
Managing STT comes under the purview of the Securities Transaction Tax Act (STT Act). And, it has all the details related to the calculation method of STT, which party is responsible for paying it, and also a list of financial instruments that qualify for STT.
STT is collected the same way as TCS and TDS. That is, deducted at the origin. For capital market tradings, STT is received by the stock exchange and deposited with the government. For mutual funds, it is filed with the AMC, and for IPOs, it is collected by the merchant bank appointed by the company.
What Are The Financial Instruments Eligible For STT?
As described in the Securities Contract (Regulation) Act, 1956, STT is levied on the following types of investment vehicles.
- – Stocks, debentures, bonds
- – Derivatives
- – Equity Mutual Funds
- – Any other marketable securities
- – Government securities that function like equities
- – Interests earned on securities
- – Units issued by any collective schemes to investors
However, STT doesn’t apply to
- – Private or off-market transactions
- – Debt and debt funds, and
- – New Fund Offers (NFOs)
STT Tax Rates
STT rates depend on the type of underlying asset in question and its volume. The rates fixed by the government and revised from time to time. Based on the transacted financial instrument, STT may apply to both buyer and seller, or seller or buyer.
Let’s consider with an example.
Suppose you have invested Rs 2 lakh in equity mutual funds. Now, the market appreciates, and your MF value grows to Rs 2.5 lakh. So, STT will apply to Rs 2.5 lakh at the rate of Rs 0.0010 percent or Rs 2.5, collected by the asset management company (AMC).
A different STT rate applies to equity shares in case of intraday trading.
For instance, if you have bought 1000 shares at the rate of Rs 20 apiece and selling those for Rs 30 a unit, STT will be calculated as,
Total STT amount calculated as (0.025*30*1000) Rs 750
For intraday trading, the applicable rate for STT is 0.025 percent.
Find the complete STT rate chart below.
| Security Type | Transaction Type | STT Rate | STT Levied On |
| Equity | Buy (Delivery) | 0.1% | Purchaser |
| Equity | Sell (Delivery) | 0.1% | Seller |
| Derivatives- Future | Buy | Nil | – |
| Derivatives-Future | Sell | 0.01% | Seller |
| Derivative-Option | Buy | Nil | – |
| Derivative-Option | Sell | 0.05% | Seller |
| Derivative-Option (When Option is exercised) | Sell | 0.125% | Purchaser |
| Equity Mutual Funds | Buy | Nil | – |
| Equity Mutual Funds- Close Ended/ ETF | Sell | 0.001% | Seller |
| Equity Mutual Funds- Open Ended | Sell | 0.025% | Seller |
| Equity Mutual Funds-Intraday (Non-Delivery) | Sell | 0.025% | Seller |
STT Tax Deductions
When you receive your trading invoice or account statement next time from your brokerage firm or Asset Management Company (AMC), it’s important to note that any additional charges above your trade costs represent the STT tax imposed on your transactions.
Transactions involving the buying and selling of equity shares, mutual fund units, or other securities are subject to the Securities Transaction Tax (STT), a non-negotiable levy. By the year’s end, you can request a statement from your brokerage detailing the STT tax you’ve paid throughout the year. This documented amount of STT can be leveraged to secure a deduction against your short-term capital gains, thereby offering a tax benefit.
The scope of STT extends to a variety of financial instruments, including:
- Equity shares, bonds, debentures, and other marketable securities typical of any corporation or corporate body
- Derivative instruments and units or other financial products offered to investors by collective investment schemes
- Security receipts as categorised under section 2 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002
- Government-issued securities that are equity-based
- Any rights or interests in securities
- Mutual funds focused on equity investments
It’s critical to understand that STT is not levied on transactions executed outside the formal market structure, known as off-market transactions.
STT on Physical Delivery of Derivatives
The Central Board of Direct Taxes (CBDT), the regulatory authority, has declared that derivatives settled physically will incur a Securities Transaction Tax (STT) of 0.1%. This levy is imposed on traders upon the successful completion of derivative deliveries. Such dealings are regarded on par with transactions involving equity shares and are subjected to identical tax rates.
This ensures that the STT tax is applied to all futures and options (F&O) contracts that are physically settled, treating them akin to equity share transfers in terms of tax implications.
STT and Its Connection with Income Tax
Securities Transaction Tax (STT) is levied on all securities trades that take place on recognised stock exchanges. The applicability of STT for income tax purposes varies based on the transaction’s intent—either for trading/investment purposes or for generating business revenue.
- Gains from Investing or Trading
When individuals, whether employed or self-managed, engage in securities trading to achieve financial gains, they must pay STT. The profits from these activities are recognised as capital gains, which are further categorised into Long-Term Capital Gains (LTCG) or Short-Term Capital Gains (STCG), contingent upon the duration of holding the securities.
- Business Income
On the other hand, organisations conducting securities transactions to generate business income must also pay STT. In such scenarios, the total STT paid can be deducted under Section 36 of the Income Tax Act during the tax filing process. STT is acknowledged as a business expenditure, qualifying for a deduction.
This distinction highlights the nuanced treatment of STT tax in the context of income tax, underscoring its significance in both trading/investment and business income scenarios.
STT And Reporting Capital Gain Tax
The capital gain tax applies when you invest in assets for investment purpose. Capital gains are of two types – long-term capital gain and short-term capital gains. Similarly, there are losses as well, incurred from trading assets at a price lower than their purchasing price. We have discussed short-terms vs long-term capital loss in detail in another article and also penned one on how to claim capital loss in income tax filing to reduce the tax burden. STT doesn’t impact capital gain tax. It can’t be claimed as cost of acquisition or clubbed with the capital loss to offset a capital gain.
However, the exception is when you trade shares as a professional. Then income from trading is treated at per income tax rates and STT paid of the revenue from stocks can be claimed under section 36 of the Income Tax Act.
Conclusion
STT is deduced at the source to reduce tax evasion. You can’t avoid paying tax or couple it with capital gain/loss to claim in the income tax return unless you are trading shares professionally. Professional tax traders can file STT in their income tax return. So, if you want to know the exact cost of your investment, refer to the above table to calculate the STT rate for the asset type.
FAQs
When was STT introduced in India?
STT was introduced in 2004 under the Finance Act, aimed at simplifying capital gain tax collection and reducing tax evasion by levying a direct tax on securities transactions.
Can STT be claimed as a deduction?
Yes, STT can be claimed as a deduction for business income under Section 36 of the Income Tax Act. It is considered a business expense for entities engaging in securities transactions for business purposes.
How is STT Calculated?
STT is calculated based on the type and volume of the underlying asset. It is levied at the time of transaction, with rates differing for various securities types such as equity shares, derivatives, and mutual funds. The government fixes the rate and may be revised periodically.
