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What is Security Transaction Tax?
Security Transaction Tax is a tax levied on every sale and purchase of securities like shares, debentures and equity oriented stocks that are listed on registered stock exchanges in India. So every time someone buys or sells their shares or other securities like bonds and equity, they are liable to pay a security transaction tax to the government.The STT was introduced in the Union Budget of 2004 as a means to control tax evasion by investors. It was found that investors were prone to hiding their capital gains to avoid tax. The STT was aimed to correct this because it works in the same way that TDS or TCS does. The stock exchange in question has to collect the tax from the investor and pay it to the government as STT.
Securities liable for STT
The Securities Transaction Tax Act (STT Act) does not provide a specific definition for the term "securities." However, it allows for the adoption of the definition provided by either the Income Tax Act, 1961 or Securities Contracts (Regulation) Act, 1956. As per the Securities Contracts (Regulation) Act, "securities" refers to various types of marketable securities, such as shares, stocks, bonds, debenture stock, and debentures issued by any incorporated company or body corporate. It also includes derivatives, units or instruments issued by collective investment schemes, securitized debt instruments, government securities of an equity nature, equity-oriented mutual funds, and rights or interests in securities.Therefore, for the purpose of STT levy, all the above-mentioned securities fall under the purview of the term "securities." It is important to note that the STT is only applicable to securities traded on the stock exchange, and all off-market transactions are not subject to STT.
Computation of the Securities Transaction Tax
Let's consider the case of Ms. Radha. An active investor in the Indian stock market. She acquires 1000 shares of ABC Ltd. at INR 50 per share and sells them at INR 70 per share. For intraday equity trading, the applicable STT rate is 0.025%. The calculation of the STT for this transaction is as follows:STT = 0.025% * 70 * 1000 = INR 17.50Now let's suppose that Ms. Radha engages in futures and options trading. She buys five lots of XYZ futures at INR 3000 and sells them at INR 3050. The lot size is 100 shares, and the applicable STT rate for futures and options is 0.01%. The calculation of the STT for this transaction is as follows:STT = 0.01% * 3050 * 5 * 100 = INR 152.50.
What is the Security Transaction Tax Rate?
| 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 equity-oriented mutual fund | 0.001% | Seller | Price at which unit is sold |
| Sale of equity share or unit of equity oriented mutual fund in recognised stock exchange by methods other than by actual delivery or transfer | 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 |
| Sale of unit of an equity oriented fund to the Mutual Fund – Exchange traded funds (ETFs) | 0.001% | Seller | Price at which unit is sold |
| Sale of unlisted shares under an offer for sale to public included in IPO and where such shares are subsequently listed in stock exchanges | 0.2% | Seller | Price at which such shares are sold |
| Purchase of equity-oriented mutual funds | NIL | - | NA |
Does STT affect capital gains tax liability?
Many new investors always wonder whether the Security Transaction Tax is deductible from the Long Term or Short term Capital Gains Tax. The short answer is no, STT cannot be claimed and is not considered under cost of acquisition of the asset.
Conclusion
To summarize, STT is a tax paid on purchase or sale of securities on registered stock exchanges. When it comes to mutual funds, only equity printed funds attract an STT payment. If you’ve invested in a debt oriented fund, then no STT is liable on it. So, the next time you want to invest in the market, keep STT in mind.
FAQS - FREQUENTLY ASKED QUESTIONS
How to Avoid STT Charges ?
Security Transaction Charge (STT) is a fee charged by the Indian government on the purchase or sale of securities, such as stocks, equity shares, futures, options, and mutual funds.
It is an unavoidable expense in the trading of shares or mutual fund units. However, it is possible to obtain a certificate of the STT paid throughout the year from your broker at the end of the fiscal year. This certificate can be utilized to claim a deduction as a business expense.
How to Claim A Refund Of STT ?
The Security Transaction Tax (STT) cannot be refunded and does not have any impact on the capital gains tax liability or the acquisition cost. The Long-Term Capital Gains Tax (LTCG) for equity is 10% for gains exceeding Rs. 1 lakh, while the Short-Term Capital Gains Tax (STCG) is 15%. However, individuals who trade in mutual funds or shares or F&O can claim STT as a business expense and deduct it from their taxes and charges.
Which Fund is Exempt From STT ?
Exemption from Securities Transaction Tax (STT) is granted to GOLD ETFs, LIQUID and Gilt ETFs, and a few selected international ETFs.
For other ETFs, STT is charged as follows:
0.001% on the sell side for delivery and BTST trades.
0.025% on the sell side for intraday trades.
Can We Reduce STT From Capital Gains ?
Securities Transaction Tax (STT) can be deducted as a business expenditure for persons reporting share income under "Profits/Gains from Business and Profession" under Section 36 of the Income Tax Act of 1961. Trading stocks as a profession from a business standpoint enables individuals to claim STT under the Income Tax Act. However, those trading stocks solely for investment purposes cannot claim STT deductions if it is not their primary profession. Profits or losses in such cases are categorized as short-term or long-term capital gains based on the period of holding the stocks.
How to Show Mutual Funds In ITR ?
If you hold onto your mutual fund investments for the entire fiscal year without selling any portion of it, then you won't be required to pay any taxes on them. The increased value of your investments won't be taxed until you decide to sell them. Only when you sell your mutual fund investments, and thereby realize the gains, will they be subject to capital gains tax. This means that you'll only need to pay taxes on the gains in the fiscal year when you redeem the investments.
What Is the Purpose of STT In Mutual Funds ?
The purpose of Securities Transaction Tax (STT) is to sell units of Equity-oriented funds (EOFs) on a recognized stock exchange, and when redeeming units of EOFs from the mutual fund. However, STT does not apply to the purchase, sale, or redemption of units of any other schemes, except for EOFs.
How Much Income from A Mutual Fund Is Tax-Free ?
The tax-free income from a mutual fund depends on the type of mutual fund and the duration other investment. The long-term capital gains from equity-oriented mutual funds are tax-free up to Rs. 1 lakh per financial year. The short-term capital gains from debt-oriented mutual funds are added to the investor's income and taxed according to their income tax slab. The long-term capital gains from debt-oriented mutual funds are taxed at a flat rate of 20% with indexation benefits. Dividends earned from mutual funds are tax-free in the hands of the investor, but the mutual fund company pays a dividend distribution tax of 10% on the dividend income distributed.
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.
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