You must be aware of the securities transaction tax. This concept came into effect in 2004 and was introduced by P. Chidambaram to fight tax evasion on capital gains. As its name implies, the securities transaction tax is primarily levied on the securities’ value except cash and commodities. Nevertheless, in 2013, several protests from the trading community and brokers caused the government to reduce the STT taxation amount.
This blog will help you take a closer look at what is security transaction tax, its features, and more.
What is Securities Transaction Tax?
Are you wondering what is security transaction tax? One type of financial transaction tax that resembles tax collected at source (TCS) is STT. Every purchase and sale of securities listed on recognised stock exchanges in India is subject to STT, a direct tax. The Securities Transaction Tax Act (STT Act) regulates STT and lists the several types of taxable securities transactions—that is, transactions on which STT is imposed.
Derivatives, equities, and units of equity-oriented mutual funds are examples of taxable securities. It also covers shares not listed but sold via an initial public offering (IPO) and later listed on stock exchanges. STT is a sum that must be paid in addition to the transaction value, which raises the value of the transaction.
STT is levied on taxable securities transactions, as was previously noted. The STT Act also specifies the transaction amount for which STT must be paid and the party who must make the payment—either the seller or the buyer. Nonetheless, the government will set the security transaction tax rate and may occasionally adjust it as needed.
STT collection provisions function similarly to TCS or TDS. An authorised stock exchange must collect security transaction tax in India, the lead merchant banker in the event of an IPO, or the prescribed person in the case of any mutual fund, as applicable, and must then be paid to the government by the seventh of the following month at the latest.
Should the aforementioned individuals be unable to collect the taxes, they are nevertheless required to discharge an equivalent amount of taxes to the Central Government’s credit by the seventh of the subsequent month. Furthermore, interest will be charged and legal repercussions if the collected amount is not collected or remitted.
STT Example
Here’s an example to show you how is securities transaction tax calculated:
Consider a scenario where a dealer buys 500 shares for Rs. 10,000 at Rs. 20 each and sells them for Rs. 30 each. The intraday security transaction tax rate of 0.025% will be used if the trader sells the shares that same day.
STT = 0.025*30*500 = Rs. 375 as a consequence.
Likewise, 0.01% is the proper STT for options and futures. The STT is computed as follows if a trader purchases five lots of Nifty futures at Rs. 5,000 and sells them for Rs. 5,010:
0.01*5010*50*5 = Rs. 125.25 is the security transaction tax in India.
The SST Charge and Its Features
SST is a straightforward, direct tax. Its application or levy is not complicated. The following is a quick description of this simple yet significant tax’s features:
- All sell transactions related to futures or options contracts will be subject to an SST tax charge.
- The SST charge is imposed on every sale transaction in the case of futures and options contracts. To calculate this tax, every future contract is evaluated at the genuine transacted price. Options contracts have a premium valuation applied to the deal.
- SST is imposed at a set rate on the transaction value.
- The sum of all security transaction tax on intraday trading individuals under them must be paid in terms of the amount of SST due by a clearing member. For traders and investors, this helps to simplify the calculating process and offers predictability.
How is STT Levied?
Selling or buying securities on listed stock exchanges is subject to STT. The Indian government periodically sets the security transaction tax rate. Security transaction tax from investors must be collected by listed stock exchanges, recognised organisations for mutual funds, or merchant bankers for initial public offerings (IPOs) and deposited with the government by the seventh of each month.
The various transaction rates are as follows:
| Taxable Securities Transaction | STT Rate | Person Responsible for Paying STT | Value on Which STT is Levied |
| Delivery-based sale of equity share | 0.1% | Seller | Price at which equity is sold |
| Delivery-based purchase of equity share | 0.1% | Purchaser | Price at which equity shares are purchased |
| Sale of equity share or a unit of an equity-oriented mutual fund when such contract is settled otherwise by actual delivery of unit or share | 0.025% | Seller | Value of securities based on the volume-weighted average price |
| Sale of units of mutual funds | 0.001% | Seller | The selling price of the mutual fund units |
| Sale of options in securities | 0.05% | Seller | Value of options premium |
| Sale of futures in securities | 0.01% | Seller | The trading price of futures |
| Sale of options in securities where options are exercised | 0.125% | Purchaser | The settlement price of a contract |
| Sale of a unit of an equity-oriented fund to the Mutual Fund – ETFs | 0.001% | Seller | Price at which unit is sold |
| Purchase of Units of Equity Oriented Mutual Funds | NIL | Purchaser | NA |
| Sale of unlisted shares under an offer for sale to the public included in IPO and where such shares are subsequently listed in stock exchanges | 0.2% | Seller | Price at which such shares are sold* |
Securities Transaction Tax and Income Tax
The reason behind share transactions determines how much profits obtained via share market trading are subject to taxes. A person can exchange shares as an investment or for commercial objectives. The security transaction tax that the government imposes differs in both situations. The following two heads can be distinguished based on this aspect.
- Income from Capital Gains: Income from capital gains is relevant if the assessee is a self-employed or salaried individual who trades stocks primarily for investment purposes and does not make a living from security transaction tax on intraday trading. In certain situations, profits or losses might be classified as long-term or short-term capital gains, depending on how long the stocks are held. Gains are categorised as short-term capital gains if the holding time is less than a year; long-term capital gains apply to share ownership with a holding duration of more than a year.
- Income from Share Trading as a Profession: This situation occurs when someone trades stocks professionally and from a business standpoint to make money. In these situations, the profits and losses from share trading are categorised as company revenue. The government then taxes this at the standard income tax rates. Section 36 of the Income Tax Act then allows for the claim of a deduction for securities transaction tax paid on income from taxes.
Conclusion
One of the most important aspects of India’s financial system is the security transaction tax in India (STT). For traders and investors to make well-informed selections that complement their financial goals and strategies, it is critical to comprehend the finer points of STT and fees. Hopefully, you now have a solid understanding of Securities Transaction Tax (SST), including its definition, characteristics, applicability, and other significant aspects covered in this article.
FAQs
STT in India is determined based on the nature of the security being traded and the type of transaction being conducted. The applicable rates vary for different securities and transactions, expressed as a percentage of the transaction value.
Securities Transaction Tax (STT) is a direct tax imposed on securities transactions at the time of the transaction itself. In contrast, Capital Gains Tax (CGT) is applied to the profit generated from the sale of a capital asset and is imposed at the time of the sale.
Non-payment of Securities Transaction Tax (STT) can lead to penalties, accrual of interest, and legal actions initiated by the tax authorities.
In India, the Securities Transaction Tax (STT) applies to various transactions involving securities, including stocks, mutual funds, and derivatives.
Security Transaction Tax (STT) is a direct tax imposed on the buying and selling financial instruments, such as equity, debentures, bonds, derivatives, and mutual funds. In the case of mutual funds, STT is levied solely on the sale of MF units in equity and balanced funds, applying to both open-ended and close-ended schemes.