What is Securities Transaction Tax (STT)?

Do you actively trade in the stock market and feel concerned about how multiple taxes imposed by the Indian government impact your returns? You’re not alone. One such levy that directly affects every trade is the Securities Transaction Tax (STT). 

In this blog, we break down what STT is, how it works, and why it matters for traders and investors alike.  

Overview of Securities Transaction Tax (STT)

The Indian government levies this type of tax on the buying and selling of shares, mutual funds with an equity focus, and derivatives that are exchanged on the Indian stock exchange. This tax, which is levied on the transaction value and applies to both share buyers and sellers, increases the transaction cost. The Securities Transaction Tax Act (STT Act) regulates this type of direct taxation. Unlisted shares sold through an IPO or other offer for sale to the public are likewise subject to this tax. 

History of Securities Transaction Tax

P. Chidambaram, a former finance minister, instituted this tax in 2004. It is levied based on the value of securities, as the name implies (excluding commodities and cash). After numerous brokers and trading members protested this charge, the government was compelled to lower the STT tax in 2013. 

Meaning of Securities

The term “Securities” has been defined under the Securities Contracts (Regulation) Act and includes the following:

1. Shares, scripts, bonds, and other marketable securities.
2. Derivatives instruments.
3. Government securities of an equity nature.
4. Units of equity-oriented mutual funds.

Features of STT

1. The tax rate varies based on the type of security and the type of transaction. For instance, the tax rate differs for delivery-based and intraday transactions. 
2. It is calculated as a fixed percentage of the transaction value.
3. STT is levied on both buy and sell transactions.
4. Depositories and exchanges collect it at the point of transaction and automatically deduct it during the settlement process.
5. STT is a source of revenue for governments.

Securities Transaction Tax Rate

The tax rates of STT for different types of transactions and securities are as follows-

1. Purchase of Shares – In the case of delivery-based purchases of equity shares, the rate of STT is 0.1% and is paid by the purchaser at a price on which equity shares are purchased.
2. Sale of Shares – In the case of the delivery-based sale of equity shares, there is a similar tax rate of 0.1%, but the seller pays it at a price at which equity shares are sold. On an intraday basis, the applicable tax rate is 0.025%.
3. Equity Mutual Funds – In this case, units of an equity-oriented mutual fund sold outside of the delivery or transfer on a recognised stock exchange, the tax rate is 0.025% and is paid by the seller at a price on which equity share or units is sold. In a delivery-based sale, the seller pays 0.0001% of the price at which the unit was sold.
4. Derivative Options – On the sale of option contracts, STT is now levied at 0.15% of the option premium, payable by the seller. (Revised upward from 0.1%, reflecting a 50% hike.)
5. Derivative Futures – In the case of the sale of futures contracts, the applicable STT rate is 0.05% of the traded price, payable by the seller. (Revised upward from 0.02%, reflecting a 150% hike.)
6. Exchange Traded Funds – In the case of exchange-traded funds, the applicable tax rate is 0.001% and is paid by the seller at the price at which units are sold.
7. Unlisted Shares – When unlisted shares, such as IPOs, are sold and later listed on a stock exchange, the tax rate is 0.2%, and the seller must pay it at the price at which the units are sold. 

Read Also: Types Of Taxes In India: Direct Tax And Indirect Tax

Example of Securities Transaction Tax

A trader buys 5 lots of Nifty call options at a premium of ₹120 and later sells them at ₹150. Since STT on options is charged only at the time of selling, the buying price does not matter for this calculation.

STT calculation

STT = 0.15% × Selling Premium × Lot Size × Number of Lots

STT = 0.15% × 150 × 65 × 5

First, calculate the total option value at sell:
150 × 65 × 5 = 48,750

Now apply STT:
0.15% of 48,750 = ₹73.13 (approx.)

So, with a Nifty lot size of 65, the STT payable on this trade would be around ₹73.13.

Futures Trading (Updated STT Rate)

Under the revised rules, STT on futures trades has been increased to 0.05%, up from the earlier 0.02%.

Assume a trader buys 5 lots of Nifty futures at ₹23,000 and later sells them at ₹23,010. The lot size is 65.

For futures contracts, STT is charged only on the selling side, so the buy price does not come into play here.

STT Calculation

STT = 0.05% × Selling Price × Lot Size × Number of Lots

STT = 0.05% × 23,010 × 65 × 5

First, calculate the total contract value on sell:
23,010 × 65 × 5 = 7,478,250

Now apply STT:
0.05% of 7,478,250 = ₹3,739.13 (approx.)

Impact of Securities Transaction Tax on Investors

This tax has a significant impact on investors in India; let us understand how.

1. Transaction Cost – The applicable STT rate increases the cost of trading, eventually leading to a decline in investors’ returns, especially for those who trade frequently.
2. Liquidity – As the STT will increase the transaction cost and decrease the trader’s profit, some investors prefer to stay away from the market and look for some other investment option, which will impact the market volume.
3. Investment strategies – This can impact the investment strategy as market participants may shift to long-term investing rather than short-term trades.
4. Net Return – The net return earned by the investor will reduce because of STT.

Read Also: What is Capital Gains Tax in India?

Conclusion

In summary, the government charges a securities transaction tax on all transactions, including the purchase of stocks, mutual funds, derivatives, and other financial instruments on stock exchanges. Without a doubt, these taxes reduce your net return, but there is no getting around the fact that the Indian government depends heavily on them. 

Frequently Asked Questions (FAQs)