What Is Securities Transaction Tax And Why Is It Levied?

In India, several people tend to evade paying taxes to save their tax outflow. To prevent such practices, the government from time-to-time introduces new laws and modifies the existing code. When people started to evade taxes on their capital gains by not disclosing the profits earned on the sale of stocks, the government introduced the Securities Transaction Tax or STT under the Finance Act in 2004 as an efficient means to collect taxes from transactions made in the financial market.

STT is a type of financial transaction tax, which is similar to the TCS or Tax Collected at Source . It is a direct tax that is levied on the purchase and sale of securities that are listed on the domestic stock exchanges. The STT Act governs it, and the central government of India collects the tax. The STT act has listed all the taxable securities.

• STT is applicable only on the securities transactions made through a recognised stock exchange. STT is not applied to off-market share transactions.
• It is applied to all futures and options sales transactions.
• For STT calculation, all future trades are valued at the actual traded price, whereas, the options trade are valued at the premium.

The STT is applied to different types of transactions made on the Indian stock exchanges. As per the Securities Contract Act, 1956, STT is applied on the following transactions:

• bonds , shares, debentures , and any other similar marketable securities that are traded at the stock market .
• Derivatives
• The units that are issued by any collective investment scheme
• Government securities that are equity in nature
• Equity mutual funds

The securities transaction tax is levied at the time of purchase or sale of the equities listed on the domestic stock market. All the transactions that you carry out involving equities or equity derivatives like futures and options are taxable as per the STT act norms.The STT is charged as soon as the transaction is completed and the government determines the tax rate. Since the tax is applied as soon as the transaction is done, the chances of non-payment or wrong payment are minimal. This makes STT transparent and highly effective. Let us understand the application of STT with an example: Suppose you buy 500 shares at Rs. 20 per share for Rs. 10,000, and sell the same at Rs. 30 per share on the same day, then intraday STT will be applied at the rate of 0.025%.So, the STT applicable would be Rs. 375 (0.025x30x500).

The government decides the STT rate, and it is similar to Tax Deducted at Source (TDS). A recognised stock exchange collects it, and in case of an IPO, the tax is collected by the merchant bank. The STT rate differs based on the type of security traded and on the type of transaction undertaken, whether it is a purchase or a sale.Let us look at the STT rate for different securities transactions.

Whether you buy or sell shares or units of mutual funds, STT will be applicable on all your transactions and it is unavoidable. At the end of the financial year, you can ask the broker to provide you a STT certificate for the taxes you have paid during the year, and use it to claim deduction from your STCG (Short-term Capital Gains) and get a tax credit.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.