Securities Transaction Tax (STT): Overview, Characteristics, and Applicability

To prevent taxpayers from evading the Capital Gains Tax and from not reporting profits gained from stocks, the Finance Act introduced the Securities Transaction Tax (STT) in 2004. Regulated by the Securities Transaction Tax Act, STT is a direct tax levied on the buying and selling of securities on recognized stock exchanges. 

Through this blog, we’ll understand the meaning and features of Securities Transaction Tax, along with the securities on which it is applicable and how it is levied, to reduce speculative trading and generate revenue from the financial markets. 

What is STT or Securities Transaction Tax? 

The full form of STT is Securities Transaction Tax. Securities Transaction Tax (STT) is a direct tax applied to the trading of securities listed on recognized stock exchanges in India and is regulated by the Securities Transaction Tax Act. Introduced in 2004, the Securities Transaction Tax (STT) was designed to reduce speculative trading and generate revenue from the financial markets. It is charged on the value of securities traded on recognized stock exchanges, including stocks, derivatives, and equity-based mutual funds. 

STT must be collected by recognized stock exchanges or designated persons in the case of mutual fund managers or lead merchant bankers in the case of an IPO. The collected tax must be paid to the government by the 7th of the following month. If they fail to collect the tax, they are still responsible for paying the equivalent amount to the government by the same deadline. Failure to collect or pay the tax on time may lead to interest charges and penalties.

Let’s consider an example to understand STT better: 

A trader buys 3,000 shares at ₹50 per share, which amounts to ₹1,50,000, and sells them at ₹55 per share on the same day. Since it’s an intraday trade, the STT rate of 0.025% applies.

The STT calculation would be:
STT = 0.025% * ₹55 * 3,000 = ₹41.25.

For futures and options, imagine the trader buys 4 lots of Nifty futures at ₹6,000 and sells them at ₹6,015. With an STT rate of 0.01%, the calculation is:

STT = 0.01% * 6,015 * 50 * 4 = ₹120.30.

Key Features of Securities Transaction Tax (STT) 

• Revenue Generation: STT generates revenue for the government without putting a heavy burden on investors, as it is a small percentage of the transaction amount.

• Legal Framework: STT is governed by the Securities Transaction Tax Act of 2004, which outlines the rules for imposing, collecting, and managing the tax.

• Applicability: STT applies to the buying and selling of equity shares listed on recognized stock exchanges. It also includes futures and options trades in the equity market, as well as the sale of equity-oriented mutual fund units traded on stock exchanges.

• Different Rates: STT rates vary depending on the type of security and the type of transaction (buy or sell).

• Transparency: STT is easy to understand and comply with, making it straightforward for traders and investors. It also helps reduce tax evasion compared to other transaction taxes.

• Legal Framework: STT is governed by the Securities Transaction Tax Act of 2004, which outlines the rules for imposing, collecting, and managing the tax.

What are the Securities on which STT is Applicable? 

The term “securities” is not directly defined under the STT Act, but the Act allows using definitions from other laws like the Securities Contracts (Regulation) Act, 1956 or the Income-tax Act, 1961. According to the Securities Contracts (Regulation) Act, “securities” include:

• Derivatives
• Shares, scrips, stocks, bonds, debentures, and similar marketable securities from companies or other organizations.
• Equity-like government securities.
• Units or instruments from collective investment schemes.
• Equity-oriented mutual fund units.
• Securitized debt instruments.
• Rights or interests in securities.

These securities, when traded on recognized stock exchanges, are subject to STT. However, off-market transactions are not covered under STT.

What is the STT on the Physical Delivery of Derivatives?

Derivative contracts are typically settled in cash. In this, no physical exchange of stocks occurs and profits are paid between the parties involved. These cash-settled transactions have an STT rate of 0.001%. However, confusion regarding the applicable STT rate arose when in a SEBI circular from April 11, 2018, 46 stocks were listed where derivatives would be settled through the physical delivery of shares instead of cash.

As per a statement by the Central Board of Direct Taxes (CBDT) on August 27, 2018, when a derivative contract is settled by physically delivering shares, it should be treated the same as an equity transaction where shares are delivered. This means that the 0.1% Securities Transaction Tax (STT) rate, which applies to regular delivery-based equity trades, will also apply to these physically settled derivative contracts.

How is Securities Transaction Tax (STT) Levied?

Note: According to the Union Budget 2024:

• It is proposed to raise the Securities Transaction Tax (STT) on the sale of options in securities from 0.0625% to 0.1% of the option premium.
• The STT on the sale of futures in securities is set to increase from 0.0125% to 0.02% of the trading price of those futures.

When is the Securities Transaction Levied?

Each time shares are bought or sold on a recognized domestic stock exchange, a Securities Transaction Tax (STT) is applied. The government sets the tax rate. According to the STT Act, all stock market trades involving shares or equity-based products like futures and options are taxed. This tax is charged right after the transaction is completed, making the process fast, clear, and efficient. Since the tax is applied immediately, there are few chances of non-payment or wrong payments. However, it increases the overall cost of trading.

Connection Between Securities Transaction Tax (STT) and Income Tax

Tax on Capital Gains
When the Securities Transaction Tax (STT) was introduced in 2004, a new Section 10(38) was added to give tax benefits to those paying STT. According to income tax law, for transactions done until March 31, 2018, any capital gains from selling shares or equity-oriented mutual funds (EOMF) that are subject to STT were taxed at a favorable or zero rate.

• Long-term capital gains (if shares or EOMF are held for more than 12 months) were tax-free.
• Short-term capital gains on these securities were taxed at a reduced rate of 15%.

From July 23, 2024, the short-term capital gains tax increased to 20%.

However, to prevent people from abusing the tax exemption on long-term capital gains by engaging in fake transactions to show unaccounted income as tax-free, the Finance Budget of 2018 removed the tax exemption. Now, long-term capital gains on shares and EOMF from transactions after April 1, 2018, are taxed at a reduced rate of 10%. This rate was further increased to 12.5% from July 23, 2024.

For gains made until January 31, 2018, a “grandfathering” rule applies. This means that for shares or EOMF acquired before February 1, 2018, the cost of acquisition will be considered the fair market value as of January 31, 2018, for tax purposes.