Securities Transaction Tax (STT): Meaning & Tax Rate

Around the late 1990s and early 2000s, stock market traders and investors started taking measures to evade taxes on their capital gains. The Finance Act in 2004 introduced Securities Transaction Tax (STT) to prevent this evasion.The tax is collected directly at the time a trader or investor buys/sells securities like equities and derivatives. Take a look at what this tax is, STT rate, who levies and collects this tax, and more-

The Securities Transaction Tax can be defined as a tax levied on financial transactions that take place on recognized stock exchanges. It is a type of direct tax that is levied and collected by the Central Government. It is worth noting that STT is only applicable to the transactions that take place on stock exchanges. There is no STT on off-market equity transactions.

The securities that are covered under STT are as follows-

• Shares, stocks , bonds , scripts, debentures , and other marketable securities
• Derivatives like futures and options
• Units or instruments issued to investors through investment schemes
• Interest or rights in securities
• Equity-oriented government securities
• Securitized debt instruments
• Equity-oriented mutual funds

The STT rate depends on the security type and even on the nature of the transaction. Here is a brief overview of current STT rate on different instruments-

Let us consider that you invested Rs. 2 lakhs in an equity-oriented mutual fund. There is no STT on buying equity-oriented mutual funds.Now, after six months, the NAV of the scheme grew, and your investment of Rs. 2 lakhs turned into Rs. 2.5 lakhs. You now decide to sell the fund units.The government levies STT of 0.001% at the time you sell the units.So, at the time you redeem the fund units, the fund house will deduct STT of 2,50,000 x 0.001/100. This will be only Rs. 2.5.

In the stock market, the derivatives segment is generally traded in contracts. No physical delivery of equities takes place. Investors/traders only buy/sell contracts. As per the table above, such transactions levy an STT of 0.01%.But in April 2018, SEBI, in its circular, released a list of 46 stocks whose derivatives contracts would only be settled through physical delivery. So, the exchanges then started levying STT of 0.1% on futures trading of these 46 stocks. This was ten times the STT rate of 0.01% applicable to the futures segment.The ANMI (Association of National Exchange Members of India) then lodged a petition before the Bombay High Court. The court then approached the Central Bureau of Direct Taxes (CBDT) for the same.The CBDT, then in its circular dated 27thAugust 2018, clarified that derivatives contracts that are settled through physical delivery would be treated as delivery-based equity transactions for levying STT. So, the STT applicable to such derivates transactions is now similar to the STT of delivery based equity transactions.

The STT and capital gains tax are different. You cannot consider STT as the acquisition cost, and it cannot be used for reducing your liability of capital gains tax. Currently, the LTCG (Long-Term Capital Gains Tax) rate is 10% for equity investments held for more than 12 months, and STCG (Short-Term Capital Gains) tax of 15% is applicable for investments held for less than 12 months.But note that professional investors and traders can treat STT as a business expense.

While STT is automatically deducted when investors or traders buy or sell securities, it is still important to thoroughly understand it so that you are fully aware of how your gains would be taxed.Every time you buy/sell securities that come under the tax bracket, you can check the STT levied by the fund house/broker on the contract note or account statement.Ready to make the most of your money? Start your tax planning journey now!

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.