What is security transaction tax & How Does It Work?

Securities Transaction Tax (STT) is a tax imposed when you buy or sell securities on Indian stock exchanges. Governed by the Securities Transaction Tax Act (STT Act), It applies to transactions involving equity, derivatives, units of equity-oriented mutual funds, unlisted shares sold under an Offer for Sale (OFS) included in an Initial Public Offering (IPO), and listed shares.

The rate at which STT is charged is decided by the government and may be revised periodically.

History of STT

STT was introduced in the Union Budget 2004 to prevent capital gains tax evasion through not real losses. Long-term capital gains (LTCG) tax was exempted, but STT was introduced to make sure there is tax compliance. LTCG tax was reintroduced in 2019.

Who Collects Securities Transaction Tax?

The Government of India collects all taxes levied under STT. It is imposed on brokers, who then collect it from their clients and deposit it with the government.

Features of STT

STT has some unique features because it was designed to collect taxes from the financial market:

• STT applies to sell trades in options and futures.
• It is only collected on recognized stock exchanges.
• The clearing member is responsible for paying the total STT owed by trading members.
• STT on futures is based on the current market price, while for options, it is based on the premium traded value.
• The Indian Central Government decides the STT rates.

STT is not considered taxable income. However, profits from the sale of securities are taxable under the Income Tax Act.

Example of Securities Transaction Tax

• Equity Delivery Trade: If an individual buys and sells shares worth ₹1,00,000, they will pay an STT of ₹100 (0.1% of ₹1,00,000). The STT is automatically deducted and collected by the stock exchange.

How is Securities Transaction Tax Calculated?

Here's how STT is calculated for various types of securities:

STT on Futures and Options

Futures

• Current Rate: 0.01% on sell-side turnover.
• Example: A trader buys 10 lots of NIFTY50 futures at ₹17,000 and sells them at ₹17,010.
• STT Calculation: STT = 0.01% x ₹17,010 x 10 x 50 = ₹850.

Options

• Current Rate: 0.05% on the sell-side premium value.
• Example: A trader sells 1 lot of NIFTY50 17,000 CE at a premium of ₹100.
• STT Calculation: STT = 0.05% x ₹100 x 1 x 50 = ₹2.5.

Differences between Securities Transaction Tax (STT) and Commodities Transaction Tax (CTT)

Current STT Rates

Conclusion

STT is an indirect tax imposed on securities transactions to ensure compliance and minimize tax evasion. It is collected by brokers and deposited with the government. Understanding the rates and calculations of STT is crucial for traders and investors to manage their costs effectively.