The central government has received ₹4.62 trillion in direct tax revenue so far this financial year (as of 17.06.2024). Out of this, ₹2.81 trillion came from personal income tax. This amount includes money collected from the Securities Transaction Tax (STT).
What exactly is STT? Keep reading to understand the security transaction tax meaning.
What is security transaction tax?
STT is a direct tax charged on purchasing and sale of stocks and other securities. It was introduced in 2004 to make tax collection on market transactions easier and to reduce tax fraud. The transaction duty is charged on transactions done through recognised stock exchanges.
When you buy or sell stocks, derivatives, or mutual fund units, you pay STT. The levy applies whether you make a profit or a loss on the trade. Consequently, every time you trade, you pay a little extra because of STT. It makes each transaction slightly pricier.
The government decides the STT rates and can change them over time. Bourses, mutual funds, or merchant bankers collect this tax. By the seventh of the subsequent month, the proceeds must be remitted to the state. If they don’t, they can face penalties and interest charges.
How does security transaction tax in India work?
STT security transaction tax works like TDS or TCS ( Tax deducted or tax collected at source). It was set to replace the older stamp duty system.
Taxes are taken out automatically when you trade securities. The buyer and the seller, being the parties to the transaction, split the toll. The rate of tax varies based on the items you trade. The security transaction tax rate, for equity shares, for instance, is 0.1% of the transaction amount.
Now, how is securities transaction tax calculated? Say you are buying stocks worth ₹1k, then ₹1 (1000* 0.1%) will be deducted.
Subsequently, the proceeds will be transferred to the state through the Reserve Bank of India, State Bank of India, or any other permitted banking third party.
The transaction duty applies to all trades on recognised stock exchanges. It also includes off-market trades and some foreign exchanges. STT’s number one aim is to bring in income for the government. It also helps reduce excessive speculative trading by making it more expensive.
Types of transactions subject to STT
The STT levy applies to different kinds of securities traded on recognized bourses. Please note that the “securities” is not explicitly defined within the Securities Transaction Tax Rules of 2004 itself. However, here are the main types of transactions subject to STT:
- Equity shares and stocks: STT is levied on the buying and selling of equity shares and stocks on recognized exchanges like BSE and NSE.
- Derivatives: Futures and options contracts incur STT, typically when they are sold.
- Mutual funds: Equity-oriented funds get STT during purchase or sale.
- Securitized debt instruments: Trading of securitized debt instruments faces taxation.
- Government securities: STT applies to government securities of an equity nature.
- Collective investment schemes: Units or instruments issued by collective investment schemes incur STT when traded.
- Rights or interests in securities: Rights shares, bonus shares, and other interests in securities are subject to STT when traded on stock exchanges.
Security transaction tax rate
To answer the most common question, “How much is security transaction tax?” Here is the table. These are the recent levies from April 1, 2023.
| Security | STT rate (%) | Payer | Basis for STT Calculation |
| Purchase of equity share/unit of business trust | 0.1 | Purchaser | Volume weighted average price |
| Purchase of equity oriented fund unit | NIL | NIL | NA |
| Sale of equity share/unit of business trust | 0.1 | Seller | Volume weighted average price |
| Sale of equity oriented fund unit | 0.001 | Seller | Volume weighted average price |
| Sale of equity share/unit (non-delivery) | 0.025 | Seller | Volume weighted average price |
| Sale of option in securities | 0.0625 | Seller | Option premium |
| Sale of exercised option | 0.125 | Purchaser | Intrinsic value (post-01.09.2019) / Settlement price (pre-01.09.2019) |
| Sale of futures in securities | 0.0125 | Seller | Traded price |
Usually, derivative contracts are settled in cash, and the STT is 0.001%. However, in April 2018, SEBI listed 46 stocks for physical delivery instead of cash. At first, stock exchanges charged 0.1% STT for these transactions.
This led to a petition by the Association of National Exchange Members of India or ANMI. The Bombay High Court asked the Central Board of Direct Taxes for clarification. In August, 2018, the central board clarified that the 0.1% STT rate for delivery-based equity transactions also applies to these physically settled derivative contracts.
Features of Securities Transaction Tax
Securities Transaction Tax (STT) is a direct tax levied on the purchase and sale of securities listed on recognised stock exchanges in India. It is automatically charged at the time of executing a trade, meaning investors and traders do not have to calculate or pay it separately. The tax is collected by the broker and passed on to the government, ensuring seamless compliance.
Another key feature of STT is that it applies only to specific financial instruments such as equities, equity-oriented mutual funds, and derivatives. The rates vary depending on the type of transaction—whether it is delivery-based trading, intraday trading, or futures and options. Since it is transaction-based, STT is applicable regardless of profit or loss.
Benefits of STT
One of the primary benefits of STT is that it simplifies tax collection for the government. Since the tax is deducted at the source during each trade, it reduces the chances of tax evasion and ensures transparency in the financial system.
For investors, STT brings clarity and ease of compliance. It removes the need for complex calculations related to transaction taxes and integrates seamlessly with trading activity. Additionally, it helps distinguish between different types of gains, such as short-term and long-term capital gains, which are taxed separately under income tax rules.
Security Transaction Tax Rate (Updated)
STT rates vary based on the type of security and the nature of the transaction. For example, delivery-based equity trades attract STT on both buying and selling, while intraday trades attract STT only on the selling side. Futures and options have different rates, typically lower than equity delivery trades.
These rates are subject to periodic revisions by the government. Therefore, traders and investors should stay updated with the latest STT rates to understand their transaction costs accurately and plan their strategies accordingly.
Why Was STT Introduced?
STT was introduced in India in 2004 to streamline the taxation of securities transactions and reduce tax evasion in the capital markets. Before its introduction, tracking and taxing capital gains was more complex and prone to non-compliance.
By implementing STT, the government created a system where taxes are collected at the point of transaction itself. This not only improved transparency but also made tax administration more efficient, as it reduced the dependency on self-reporting by taxpayers.
Impact of STT on Investors and Traders
STT has a direct impact on trading costs, especially for frequent traders. Since it is charged on every transaction, high-frequency traders may see a noticeable effect on their overall profitability due to cumulative costs.
For long-term investors, however, the impact is relatively lower because the number of transactions is limited. In fact, STT plays a role in determining tax treatment for capital gains, which can benefit investors holding stocks for longer durations.
When is Securities Transaction Tax Levied?
STT is levied at the time of executing a trade on a recognised stock exchange. It applies to both buying and selling transactions depending on the type of security and trade (delivery, intraday, derivatives).
For example, in delivery-based equity trades, STT is charged on both sides of the transaction, while in intraday trading, it is usually applied only when selling the shares. This automatic deduction ensures that traders do not miss or delay tax payments.
STT vs Other Trading Taxes
| Basis | STT (Securities Transaction Tax) | Other Trading Taxes (GST, Stamp Duty, etc.) |
|---|---|---|
| Type of Tax | Direct tax on transactions | Indirect taxes on services and contracts |
| Applicability | Applied on buy/sell of securities | Applied on brokerage, contracts, and services |
| Collection Method | Automatically deducted by broker | Charged separately in contract note |
| Rate Variation | Depends on type of trade (equity, F&O) | Depends on service or state regulations |
| Purpose | Reduce tax evasion and simplify tracking | Revenue generation from services and agreements |
| Impact on Traders | Directly affects transaction cost | Adds to overall trading charges |
STT is unique because it is directly linked to trading activity, whereas other taxes like GST and stamp duty are applied on associated services and transactions.
Common Misconceptions About STT
A common misconception is that STT is a replacement for income tax on trading profits. In reality, STT is separate and does not eliminate the need to pay capital gains tax or business income tax on profits.
Another misunderstanding is that STT is charged only when a trade is profitable. However, STT is levied on every transaction, regardless of whether the trader makes a profit or incurs a loss. Understanding this helps traders better calculate their net returns and overall costs.
Bottomline
We hope you now are aware of the securities transaction tax definition. This direct tax simplifies tax collection and helps curb speculative trading. By understanding STT rates and applicable transactions, investors can better manage their trading costs and comply with tax regulations.
FAQs
- How is STT calculated?
STT, or Securities Transaction Tax, is calculated based on the value of your trade. For example, if you buy or sell stocks worth ₹1,000, the STT rate for equity shares is 0.1%. So, you’d pay ₹1 as STT (₹1,000 * 0.1%). The rate can vary for different securities like mutual funds or derivatives. It’s automatically deducted by the stock exchange during the trade.
- What is the security transaction tax in India?
It’s a transaction tax for trading securities. This rule is to make collection easier and reduce tax fraud. When you trade stocks, mutual funds, or derivatives, you pay the duty. The rate varies depending on what you’re trading. It’s automatically deducted during the trade.
- How can I avoid STT charges?
You can’t completely avoid STT charges as they’re mandatory for trades on recognised stock exchanges in India. However, you can minimise them by trading less frequently or choosing investments like mutual funds with lower STT rates. Also, consider long-term investments over short-term trades. This way, you’ll pay STT less often. Always check STT rates for different securities before trading.
- What is the STT charge percentage?
The STT charge percentage depends on what you’re trading. For buying or selling stocks, it’s 0.1 per cent. For selling equity mutual fund units, it’s 0.001%, and for futures, it’s 0.0125%. Options have a separate charge when sold and exercised. These rates can change, so always check the latest rates before trading.
- Who pays STT?
Both buyers and sellers pay STT. If you’re buying stocks, you pay the STT. If you’re selling, you pay it too. For derivatives, the seller usually pays. The stock exchange automatically deducts the STT during the transaction. So, whether you’re buying or selling, a bit of extra cost is added due to STT.
