How is STT levied?
The securities transaction tax is a tax levied on the transaction of securities carried out on listed stock exchanges in India. The Government of India introduced it to curb evasion of capital gains tax and ensure an efficient securities tax regime in financial markets.
STT is paid on transactions carried out irrespective of profit or loss from that particular transaction. STT Act, 2004 regulates Securities Transaction Tax.
Securities Liable for STT
Here are some securities liable for STT:
- Shares, bonds, stocks, scrips, debentures, or other marketable securities of an incorporated company or a body corporate
- Units or instruments in any other form issued by any collective investment scheme for its investors
- Derivatives, for example, options and futures
- Equity-oriented mutual funds units
- Any securitised debt instruments
- Rights or interest in securities
In the case of futures and options, STT will be levied only on the sale side. Note that all market transactions do not come under the purview of STT.
How is STT Levied?
STT is levied on selling or purchasing securities on listed stock exchanges. The government of India decides the rate of STT from time to time. Listed stock exchanges or recognised entities in case of mutual funds or merchant bankers in case of IPO are required to collect STT from investors and deposit the same with the government before the 7th of every month.
Here are the different rates on transactions:
|
Taxable Securities Transaction |
STT Rate |
Person Responsible for Paying STT |
Value on Which STT is Levied |
|
Delivery-based purchase of equity share |
0.1% |
Purchaser |
Price at which equity shares are purchased |
|
Delivery-based sale of equity share |
0.1% |
Seller |
Price at which equity is sold |
|
Sale of units of mutual funds |
0.001% |
Seller |
The selling price of the mutual fund units |
|
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 options in securities |
0.05% |
Seller |
Value of options premium |
|
Sale of options in securities where options are exercised |
0.125% |
Purchaser |
The settlement price of a contract |
|
Sale of futures in securities |
0.01% |
Seller |
The trading price of futures |
|
Sale of a unit of an equity-oriented fund to the Mutual Fund – ETFs |
0.001% |
Seller |
Price at which unit is sold |
|
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* |
|
Purchase of Units of Equity Oriented Mutual Funds |
NIL |
Purchaser |
NA |
STT on Physical Delivery of Derivatives
All F&O contracts are physically settled. In this case, STT is levied on traders and is charged on the successful delivery of derivatives.
CBDT, the governing body, announced that all physical delivery of derivatives would be subject to 0.1% STT. These transactions are treated similar to equity share transactions and are taxed at the same rate.
STT and Its Connection with Income Tax
All transactions of securities listed on stock exchanges are charged with STT. However, the treatment of STT income tax purposes depends on the nature of the transaction.
All transactions on stock exchanges are based on two motivations— for trading/investing and to earn business income.
-
Income from Investment/Trading
All salaried or self-employed individuals carrying out the transaction of securities for financial gains are liable to pay STT. All gains from such transactions are called capital gains and are classified as LTCG or STCG, depending on the holding period.
-
Business Income
Entities entering into securities transactions to generate business income are also liable to pay STT. However, one can claim the total STT paid as a deduction under Section 36 of the IT Act while filing returns. STT, in this case, is considered a business expense and is liable for deduction.
Takeaway
Investors should plan their positions so that their gains are not impacted significantly due to STT. This is because STT is a direct cost on transactions, and it reduces the eventual returns arising from them.
Disclaimer: This blog is solely for educational purposes. The securities/investments quoted here are not recommendatory.