What is securities transaction tax and how does it work?

When it comes to investing and trading, most people are now fully aware of their tax liabilities. While many investors understand the concept of capital gains tax, they may not know that they pay another direct tax to the government on the purchase and sale of securities. It is Security Transaction Tax (STT) and was introduced in 2004.

Let’s understand what a Security Transaction Tax and how does it work.

• Table of contents

• What is the security transaction tax?
• What are the features of the securities transaction tax?
• How does STT work?
• STT on mutual funds: Is STT applicable to mutual fund investments?
• How does securities transaction tax affect investors?
• What is the current STT rate?
• Levy of securities transaction tax

What is the security transaction tax?

STT is a direct tax imposed on transactions involving securities such as stocks, derivatives, and equity-oriented mutual funds. It is collected at the time of trade execution, both on the purchase and sale of securities. STT applies to transactions conducted on stock exchanges and is charged at different rates depending on the type of security being traded.

What are the features of the securities transaction tax?

• Point of collection: The tax is collected by the exchange at the time of trade execution and is then remitted to the government. STT also eliminates the need for tracking individual capital gains on securities transactions for tax purposes.
• Applicable to specified securities: STT is applicable to transactions in equity shares, derivatives, equity-oriented mutual funds, and other specified securities traded on recognised stock exchanges.
• STT Rate: The STT rate is levied based on the type of security being traded. However, the Securities Transaction Tax is applicable to all transactions irrespective of whether they result in a gain or loss. The rates of STT are determined by the government and may be revised periodically.

How does STT work?

Now that you know the Securities Transaction Tax Meaning and its features, you may be wondering about how it works. Here is a small example to explain it:

Securities Transaction Tax is applied as a percentage of the transaction value. It is automatically deducted at the time of executing the trade. Investors pay it to the brokers who pay it to the stock exchange, and they remit the collected STT to the government on or before the 7th of every month. So, if an investor buys stocks worth Rs. 2 lakh when the applicable STT rate is 0.1%, they will have to pay Rs. 200 as STT in addition to the trade value.

STT on mutual funds: Is STT applicable to mutual fund investments?

STT is applicable to equity-oriented mutual funds. Investors who buy or sell units of these funds through stock exchanges are subject to STT. However, STT is primarily levied on the redemption of equity mutual funds at the time of sale rather than on their purchase.

How does securities transaction tax affect investors?

• Increased transaction cost: STT (full form: Securities Transaction Tax) adds to the overall cost of trading. This may impact the trading frequency and profitability of certain securities. Exiting buyers and sellers may find it harder to buy and sell their securities easily and this may affect the market liquidity.
• Influence on investment horizon: Since STT applies to every transaction, short-term traders and high-frequency traders experience a higher tax burden. So, it indirectly promotes long-term investing by making frequent trading costlier.
• Lower profitability: Securities Transaction Tax is levied on transactions irrespective of whether it results in a gain or a loss. This means the gain will be reduced from successful trades and the losses will be increased from unsuccessful trades. Investors must account for STT when calculating net gains since it reduces the overall profitability of transactions.

What is the current STT rate?

Securities Transaction Tax rate varies depending on the type of security and transaction. As of recent regulations effective from October 2024, some common STT rates include:

• Equity delivery trades: 0.1% on both buy and sell transactions.
• Intraday equity trades: 0.025% on the sell-side only.
• Equity futures: 0.02% on the sell-side.
• Equity options: 0.1% on the premium for options that are shorted and 0.125% of the intrinsic value on exercised contracts.
• Mutual fund redemptions: The rate of STT on Mutual Funds is 0.001%. It is levied on the sale of units of equity-oriented mutual funds.

Levy of securities transaction tax

STT is levied under the Finance Act 2004 and administered by the Income Tax Department of India. The responsibility for the collection of Securities Transaction Tax lies with stock exchanges and clearing corporations. This ensures seamless tax collection without investor intervention and reduces tax evasion in the securities market. The collected tax is deposited with the government, making STT an efficient revenue stream.

In conclusion, Securities Transaction Tax (SST) plays a crucial role in India's financial ecosystem by ensuring fair taxation of securities transactions. While it increases transaction costs for investors, it simplifies tax compliance and contributes to government revenue. Investors must be aware of STT rates and their implications while investing in mutual funds and engaging in stock market activities to make informed financial decisions.

FAQs:

When was STT introduced in India?

It was introduced in 2004 to streamline securities taxation while ensuring transparency and ease of collection.

How is STT calculated?

Securities Transaction Tax is calculated as a percentage of the transaction value and is deducted at the time of trade execution. SST rates vary based on security type.

Which transactions are subject to STT?

STT applies to transactions involving equity shares, derivatives, equity-oriented mutual funds, and other specified securities traded on recognised stock exchanges in India, including buy and sell transactions, intraday trading, futures, options, and mutual fund redemptions.

How is STT different from other taxes like capital gains tax?

STT is levied on transaction value at the time of trade, while capital gains tax is based on profits earned from the sale of securities.

What are the consequences of non-payment of STT?

If you do not pay Securities Transaction Tax, it can lead to penalties, interest charges, and legal consequences. It may also impact tax calculations and eligibility for capital gains tax benefits.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
This document should not be treated as endorsement of the views/opinions or as investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.