What is the full form of STT?
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STT stands for Securities Transaction Tax.
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Securities Transaction Tax (STT)
By Bajaj Broking Team
December 12, 2024
3 mins read
Taxes
Securities transaction tax (STT) is a direct tax levied on the value of securities transactions conducted through recognised stock exchanges in India. Introduced in 2004, it was implemented to streamline tax collection from securities trading and to bring transparency in financial market operations. STT applies to equity shares, equity-oriented mutual fund units, and derivatives, depending on the type of transaction and instrument involved. It is collected at source by the exchange or broker and deposited with the government. This tax is automatically included in the contract note, eliminating the need for separate filing. STT does not apply to off-market trades. Unlike capital gains tax, STT is charged irrespective of whether the trade results in a profit or loss. For Indian investors, STT represents a fixed component of transaction costs and plays an important role in encouraging compliance, limiting speculation, and promoting a formalised trading ecosystem in the capital markets.
Securities Transaction Tax (STT) is a tax levied on the purchase and sale of securities listed on recognised stock exchanges in India. The tax is applicable to equity shares, derivatives, and equity-oriented mutual funds. It is collected by the government to regulate market transactions and ensure transparency in securities trading.
Key Takeaways
- Securities Transaction Tax (STT) is a direct tax levied on the buying and selling of securities listed on Indian stock exchanges. It applies to transactions such as equity shares, derivatives, equity-oriented mutual funds, and more.
- STT on futures has been revised to 0.02%, and on options to 0.1%, effective from October 1st, 2024.
- The hike in STT rates has increased the cost of trading in futures and options, especially for high-frequency traders.
- Both NSE and BSE now apply the same STT structure, ensuring consistency across leading stock exchanges in India.
What is Securities Transaction Tax (STT)?
Securities transaction tax (STT) is a statutory levy on transactions made in listed securities through recognised stock exchanges in India. It is imposed on both buyers and sellers in equity delivery trades, and only on sellers in intraday, futures, and options transactions. The purpose of STT is to reduce tax evasion by embedding tax collection within the transaction itself. The tax is deducted automatically during execution, requiring no further action from the investor. The STT amount varies depending on the nature of the instrument and the trade type. For instance, delivery-based equity trades are taxed at 0.1% on both buy and sell sides, while futures and options have lower rates. This structure ensures simplified taxation and contributes to better compliance in the securities market. Investors should factor in STT when planning trades, especially in high-frequency or low-margin strategies, as it adds to overall transaction costs and affects profitability.
Securities Transaction Tax (STT) is a direct tax imposed on transactions conducted on stock exchanges. It applies to both buyers and sellers of certain financial instruments, such as equities and derivatives. The tax is deducted at the source by the exchange and is remitted to the government.
How Does Securities Transaction Tax Work?
STT is charged as a percentage of the transaction value and is applicable at the time of buying or selling securities. The rate of STT varies based on the type of security and the nature of the transaction, such as delivery-based equity trades, intra-day trades, or derivatives.
Benefits of STT
STT was introduced to create a standardised taxation process for securities trading in India. It simplifies tax reporting and ensures compliance by being deducted directly at the source.
- Ease of collection
STT is collected automatically by the broker or exchange at the time of transaction, eliminating manual tax filings and reducing administrative effort for both investors and the government.
- Enhanced compliance
The source-based deduction system ensures greater tax compliance across the securities market. It reduces the possibility of under-reporting or evasion of trading-related income.
- Simplifies taxation
STT simplifies tax reporting for many retail investors. In some cases, where STT is paid, there may be no need to file capital gains separately if the total income is below the taxable limit.
- Increased transparency
STT is reflected in the trade contract note, providing clear visibility into tax costs. This builds transparency and improves financial record-keeping for investors.
STT example
Consider an investor buying 100 shares of a listed company at Rs.1,000 each through a recognised stock exchange. In delivery-based equity trades, STT is charged at 0.1% on both buy and sell transactions. On the purchase, the investor will pay Rs.100 as STT (0.1% of Rs.1,00,000). Later, when selling the shares at the same price, another Rs.100 is charged. The total STT paid would be Rs.200. In contrast, if the same transaction were intraday, STT would apply only on the sell side at 0.025%, reducing the tax burden. In the case of equity options, STT applies on the premium received from the sale. Understanding how STT is charged allows investors to estimate the true cost of a trade and helps in better financial planning. This tax directly affects the net gains or losses, particularly for short-term or high-frequency trades.
Securities on Which STT is Applicable
STT is levied on various securities, including:
- Equity shares (listed on stock exchanges)
- Equity-oriented mutual funds
- Futures and options contracts
- Sale of unlisted shares in an initial public offering (IPO) that are subsequently listed
STT Charges for Different Order Types
The table below outlines the STT rates applicable to various order types across the Indian securities market:
Transaction Type | STT Rate | Levied On |
Equity delivery (buy & sell) | 0.1% | Both sides |
Equity intraday (sell only) | 0.025% | Sell side only |
Equity futures (sell only) | 0.0125% | Sell side only |
Equity options (sell only) | 0.0625% | Premium value only |
Mutual fund (equity-oriented) | 0.001% | Sell side only |
Off-market trades | Not applicable | Not levied |
These rates are prescribed by the government and are subject to revision. Traders should refer to the latest exchange circulars or broker disclosures for updated charges.
STT Calculation
Calculating STT depends on the nature of the transaction. Investors and traders must use the correct rates and base amounts to determine the applicable tax accurately.
- Identify transaction type
Determine whether the trade is delivery-based, intraday, futures, or options. Each category has its own STT rate and calculation basis.
- Apply the applicable STT rate
Multiply the STT rate with the transaction value (or premium in case of options) to arrive at the STT amount. Rates like 0.1% for delivery or 0.025% for intraday apply accordingly.
- Use premium value for options
In options trading, STT is calculated on the premium received on sale, not on the total contract value, which is unique compared to other segments.
- Include in cost analysis
Add the calculated STT to other trading charges such as brokerage, GST, and exchange fees to assess total transaction costs and profitability.
Features of securities transaction tax
STT carries several structural features that define its scope, application, and purpose. These features shape how it influences investor activity and market conduct.
- Mandatory and non-refundable
STT is applicable to all eligible transactions on recognised exchanges and cannot be reversed or refunded, even in the case of trade losses.
- Applies only to recognised exchanges
STT is levied only on transactions conducted through SEBI-recognised stock exchanges. It does not apply to off-market or private share transfers.
- Varies by transaction type
STT rates differ depending on whether the trade is equity delivery, intraday, futures, or options. This distinction ensures that speculative and long-term trades are taxed appropriately.
- Collected at source
The exchange or broker collects STT at the time of transaction and remits it to the government. This source-based mechanism promotes better compliance and efficiency in tax collection.
Impact of Securities Transaction Tax on Investors
Securities Transaction Tax is applied on both buying and selling of listed securities. It plays a role in shaping investor behaviour and can influence overall market activity. Below is a look at how STT impacts investors:
- Higher trading expenses: STT adds to the total cost of buying and selling securities. This reduces the net invested amount initially and affects the final payout when exiting the investment.
- Lower market participation: A higher STT rate can discourage investors from actively trading, leading to fewer participants in the market and making it harder to match buy and sell orders.
- Change in investment approach: Investors may revise their strategies to avoid instruments with higher STT. This often leads to a preference for longer-term holdings even when short-term gains were originally intended.
- Reduced returns: Since STT is deducted on every trade—whether the investor earns or loses—overall profits shrink and losses deepen, which can pull down portfolio performance.
- Effect on asset demand: Securities with higher STT can become less attractive, reducing investor interest. This fall in demand may lower the market value of such securities, impacting those already invested.
Securities Transaction Tax and Income Tax
STT is considered while calculating capital gains tax. For equity investments held for over a year, long-term capital gains tax is applicable, where STT payment is a prerequisite for eligibility under preferential tax rates.
STT vs. Other Trading Taxes
Aspect | Securities Transaction Tax (STT) | Capital Gains Tax |
Applicability | Stock market transactions | Gains from asset sales |
Payment | Deducted at the time of trade | Paid during tax filing |
Refundable | No | Not applicable |
Purpose | Regulatory and revenue generation | Taxing investment gains |
Conclusion
Securities Transaction Tax (STT) is levied on transactions involving securities traded on recognised stock exchanges. It ensures streamlined tax collection and contributes to government revenue. The tax impacts different categories of investors and traders based on their trading activity. Understanding STT rates and implications can assist in planning investment strategies effectively.
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Frequently Ask Questions
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Why was STT introduced?
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STT was introduced to simplify the taxation of securities transactions and to prevent tax evasion.
When was STT introduced in India?
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STT was introduced in India in the financial year 2004-05.
Which transactions are subject to STT?
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STT applies to equity trades, derivatives transactions, and equity-oriented mutual fund transactions conducted on recognised stock exchanges.
Is STT applicable to all types of stock market trades?
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No, STT applies only to specified securities traded on recognised stock exchanges. Certain off-market transactions are exempt.
What is an example of a Securities Transaction Tax?
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If an investor sells equity shares worth Rs. 1,00,000 in a delivery-based trade, STT at 0.1% amounts to Rs. 100.
Who collects STT?
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STT is collected by stock exchanges and remitted to the government.
What is the new STT rate on Futures and Options?
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As per recent changes, the STT rate for equity futures is 0.0125% on the transaction value, and for options, it is 0.0625% on the premium amount.
How does STT impact the profitability of traders and investors?
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STT increases transaction costs, which may affect short-term traders more than long-term investors.
How much has STT increased?
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STT rates have been revised periodically. Changes are announced through budgetary provisions and government notifications.
Is STT a direct or indirect tax?
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STT is a direct tax, as it is charged on securities transactions at the time of trade execution.
What are the consequences of non-payment of STT?
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Non-payment is generally not an issue, as STT is deducted at the source by stock exchanges.
Can we claim STT in capital gains tax?
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STT is considered while calculating capital gains tax but cannot be claimed as a deduction.
Is Securities Transaction Tax refundable?
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No, STT is not refundable.
Which fund is exempt from STT?
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Certain debt-oriented mutual funds and non-equity securities are exempt from STT.
How can I avoid STT charges?
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STT is applicable on stock exchange transactions, but off-market transactions, such as direct stock transfers, may not attract STT.
What is meant by Securities Transaction Tax?
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Securities Transaction Tax (STT) is a direct tax levied on the purchase and sale of securities listed on recognised Indian stock exchanges. It applies to equity shares, derivatives, and equity-oriented mutual funds. The tax is charged at the time of the transaction and is automatically collected by the exchange.
How is STT calculated?
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STT is calculated as a percentage of the transaction value. The rate varies depending on the type of security and whether the trade is a purchase or sale. For example, delivery-based equity trades attract one rate, while intraday or derivative trades are charged differently. The exchange deducts it automatically during the transaction.
Can Securities Transaction Tax be refunded?
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STT cannot be refunded. It is a statutory levy under Indian tax laws and is not considered a refundable tax. Even if the transaction results in a loss, the STT paid remains applicable and is not adjusted or reversed under any circumstance.
Can you provide an example of Securities Transaction Tax?
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If you buy shares worth ₹1,00,000 in a delivery trade, and the STT rate is 0.1%, then ₹100 is charged as STT. This amount is deducted at the time of the transaction, and the final investment made is ₹99,900 after applying the tax.
Does the buyer or seller bear the STT cost?
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STT may be charged to either the buyer or the seller depending on the type of transaction. In delivery-based trades, the buyer pays STT. In intraday equity and derivative trades, the seller usually bears the cost. The responsibility depends on how the trade is classified.
By how much has STT increased?
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The STT on futures has gone up from 0.01% to 0.02%, and on options from 0.0625% to 0.1% from 1st October 2024. These revised rates have increased trading costs, particularly for investors engaged in high-frequency trading in the derivatives segment.
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