Securities Transaction Tax (STT): Rate and Exemptions

Securities Transaction Tax (STT) came into function after it was presented during the Union Budget of 2004. It was imposed to eradicate evasion of tax on capital gains made through security transactions. STT is an indirect tax that is collected on every transaction associated with securities listed on recognized stock exchanges.Securities Contracts (Regulation) Act defines the term ‘securities’ as the following:

1. Equity shares
2. Unlisted shares under Initial Public Offer (IPO)
3. Stocks
4. Bonds
5. Debentures
6. Other marketable securities
7. Equity-oriented government securities
8. Mutual fund (MF) units of equity nature
9. Derivatives
10. Debt instruments that can be converted to marketable securities
11. Rights or interest in securities
12. Units or any other instruments received by investors for collective investment schemes

The amount of STT charged is in addition to the value of the transaction (sale or purchase). This increases the total transaction value. The STT Act administers the tax, while the STT rate is determined and occasionally changed by the Central Government. The act also provides information regarding transaction value for tax payment and specifies who bears the burden of tax under different transaction scenarios.The collection of tax is the responsibility of the stock exchange, the merchant bank, or the designated person, depending on the transaction. The entire tax amount that has been collected is paid to the government.

The STT is paid either by the seller or purchaser at the time of the transaction. However, the rate is different for each security. Tax rates can differ for sale and purchase transactions. The following table explains the various rates:

The Income Tax Act of 1961 allows for an exemption from STT. The tax amount can be claimed if it is assumed as business expenditure. This means that capital income from securities must appear under the ‘Profits/Gains from Business and Profession’ section, implying that the taxpayer is undertaking trading of securities as part of the profession/business.However, if share trading has been undertaken from an investment point of view by a salaried or a self-employed person, then STT charged on capital gains made from the transaction of securities is not exempted.

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.