Tax
by 5paisa Research Team Last Updated: 2023-05-18T10:32:56+05:30

Introduction

Securities transaction tax or STT was implemented in the year 2004 by the Former Finance Minister, P. Chindambaram. This tax was intended to combat tax evasion on capital gains. As the name suggests, a securities transaction tax is charged on the value of securities (excluding commodities and cash). After several protests from brokers and members of the trading community, the government was forced to reduce the amount of taxation for STT in 2013.

In this blog, we will take a closer look at what is STT, its applicability, and more.

What is Security Transaction Tax?

STT or Security Transaction Tax is a type of tax that is charged on the purchase and sale of securities like stocks, mutual funds, and derivatives on recognized stock exchanges in India. The STT is a direct tax, meaning that it is levied directly on the transaction value of securities. This means that the STT is an additional cost that buyers and sellers have to bear, making the transaction more expensive.

The STT is governed by the Securities Transaction Tax Act, which lists the various types of securities transactions that are taxable. These include equity, derivatives, and unit of equity-oriented mutual funds. STT also applies to unlisted shares sold under an offer for sale to the public that is subsequently listed on stock exchanges.

The rate of STT is decided by the government and can be modified from time to time. The buyer or seller of securities is responsible for paying the STT, depending on the value of the transaction.

The STT is collected by recognized stock exchanges or prescribed persons, such as mutual funds or lead merchant bankers, who must pay it to the government on or before the 7th of the following month. If they fail to collect the taxes, they must still discharge an equivalent amount of tax to the credit of the Central Government within the 7th of the following month. Failure to collect or remit the tax can result in interest and penalties
 

How does Securities Transaction Tax work?

Now that we have covered what is STT, let’s see how it works.

As mentioned above, the Securities Transaction Tax (STT) is a tax levied on the purchase and sale of securities such as stocks, mutual funds, and derivatives in India. The STT was introduced in India in 2004 to replace the earlier system of imposing a tax on securities transactions called the "stamp duty."

The STT is levied on both the buyer and the seller of securities, with the rate varying depending on the type of security and whether the transaction is a purchase or sale. For example, the STT rate for buying or selling equity shares is currently 0.1% of the transaction value, while the rate for buying or selling equity-oriented mutual funds is 0.001%.

The STT is deducted and paid by the stock exchange on behalf of the buyer and seller, making it easier for investors to comply with the tax requirements. The tax is also applicable to transactions that take place outside the stock exchange, such as those conducted through off-market trades or foreign exchanges.

The main objective of the STT is to generate revenue for the government, but it also serves as a disincentive for speculative trading as it increases the cost of trading. Some experts argue that the STT can hurt market liquidity, as it may discourage investors from trading in certain securities or lead to an increase in the bid-ask spread.

Overall, the Securities Transaction Tax is an important source of revenue for the government and helps regulate the securities market in India.
 

Impact of Securities Transaction Tax on Investors

Now that we’ve covered STT meaning, let’s understand its impact on investors.

The Securities Transaction Tax (STT) can have a significant impact on investors in India, as it is levied on the purchase and sale of securities such as stocks, mutual funds, and derivatives. Here are some of the potential effects of the STT on investors:

1.    Increased transaction costs: The STT increases the cost of trading, which can reduce the returns for investors, especially for those who engage in frequent trading or short-term investments. This can make it difficult for investors to earn a profit and may impact their investment decisions.

2.    Reduced liquidity: The STT can reduce liquidity in the market as some investors may choose to stay away from trading in securities that attract higher STT rates. This can impact the overall trading volumes and may impact the market efficiency.

3.    Impact on investment strategy: The STT can impact the investment strategy of investors as they may choose to focus on securities that attract lower STT rates or shift their focus to long-term investments. This can impact the overall market dynamics and lead to an uneven distribution of investment capital.

4.    Distortion in pricing: The STT can distort the pricing of securities, as investors may be willing to pay less for securities that attract higher STT rates. This can impact the overall valuation of securities and lead to market inefficiencies.

Overall, the impact of the STT on investors depends on various factors, including the type of security being traded, the frequency of trading, and the investment strategy of the investor. While the STT generates revenue for the government, it is important to carefully consider its impact on investors and the overall securities market.
 

What Is the Security Transaction Tax Rate?

After understanding the security transaction tax meaning, it’s time to take a look at different STT rates.

Taxable securities transaction

Rate of STT

Person responsible to pay STT

Value on which STT is required to be paid

Delivery based purchase of equity share

0.1%

Purchaser

Price at which equity share is purchased*

Delivery based sale of an equity share

0.1%

Seller

Price at which equity share is sold*

Delivery based sale of a unit of oriented mutual fund

0.001%

Seller

Price at which unit is sold*

Shares or units of equity-oriented mutual funds sold outside of delivery or transfer on a recognised stock exchange

0.025%

Seller

Price at which equity share or unit is sold*

Derivative – Sale of an option in securities

0.017%

Seller

Option premium

Derivative – Sale of an option in securities where option is exercised

0.125%

Purchaser

Settlement price

Derivative – Sale of futures in securities

0.01%

Seller

Price at which such futures is traded

Exchange traded funds (ETFs) - Sale of equity oriented funds to mutual funds

0.001%

Seller

Price at which unit is sold*

The sale of unlisted shares included in an initial public offering (IPO) and subsequently listed on a stock exchange

0.2%

Seller

Price at which such shares are sold*

Purchase of units of equity oriented mutual funds

Nil

Purchaser

NA

 

Levy of Securities Transaction Tax

Whenever securities are purchased or sold on a recognized exchange, a security transaction tax is imposed. STT is levied on both the buyer and the seller, but the tax is collected and paid by the stock exchange on behalf of the buyer and seller.

The rates of STT differ for different types of securities and transactions and are determined by the government. For instance, the STT on equity delivery trades is 0.1% of the transaction value, while the STT on equity intraday trades is 0.025% of the transaction value. The STT on options trading is 0.05% of the premium value, while the STT on futures trading is 0.01% of the contract value.

The STT generates revenue for the government, but it also increases the transaction costs for investors. Therefore, it is important for investors to carefully consider the impact of the STT on their investments and factor it into their investment decisions.
 

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More About Tax

Frequently Asked Questions

The Finance Act of 2004 introduced the Securities Transaction Tax (STT) as an efficient and clean method of collecting taxes on financial market transactions.

The Securities Transaction Tax (STT) in India is calculated based on the type of security being traded and the type of transaction being carried out. The rates of STT are different for different types of securities and transactions, and they are expressed as a percentage of the transaction value. 

In India, the Securities Transaction Tax (STT) is levied on a variety of transactions involving securities such as stocks, mutual funds, and derivatives. 

The Securities Transaction Tax (STT) is a direct tax on securities transactions levied at the time of the transaction, while the Capital Gains Tax (CGT) is a tax on the profit arising from the sale of a capital asset and is levied at the time of the sale.

The consequences of non-payment of Securities Transaction Tax (STT) can include penalties, interest, and legal action by the tax authorities.

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