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Home / IAS Preparation / Securities Transition Tax

Security Transaction Tax (STT) - Definition, Features, Working, Example, Impact on Investors & More

Last Updated on Jan 17, 2024
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Security Transaction Tax (STT) is a tax that is levied on security transactions done on the listed stock exchanges around the world. Security Transaction Tax is considered to be an important regulator. It could raise the efficiency of the financial market by reducing the volatility of the market. Security is a financial instrument that has a monetary value and it can be traded. There is no particular definition to define Securities. A tax that is imposed upon the buying and selling of the security is called a Transaction Tax.

A security transaction tax is a more stable form of revenue than long-term capital gains for the government. STT forms an important part of government revenue and the financial system of India, therefore it becomes a very important topic in the Economy section of the UPSC examination for both prelims and mains.

This article will throw light on concepts such as what is a security transaction tax, the features of STT, the security transaction tax rate, how to calculate Securities Transaction Tax, what is the major difference between securities transaction tax (STT) and commodities transaction tax (CTT)?, the relevance of STT with income tax, etc.

What is Securities Transaction Tax (STT)?

The motivation for levying STT is to increase tax revenue. Security Transaction Tax is used as a measure to reduce market volatility. The Indian capital market forms a vital role in the Indian Financial System. In India, the concept of Security Transaction Tax was introduced to control the evasion of tax on capital gains. In 2004 STT was introduced by the Indian Government to ensure that the tax on security trade is collected in an efficient way.

The Security Transaction Tax Act governs Security Transaction Tax. The Act defines the securities on which the STT will be levied. The securities mentioned in the Act are equities, equity funds, unlisted shares of IPO, etc.

To learn about Tax and Revenue Receipts click the link attached.

Example of STT

Example: Ms Ananya is an active investor in the Indian equity markets. She purchases 100 shares of XYZ Ltd. Ms Ananya purchases the shares of XYZ Ltd. at INR 50 per share and sells them at INR 60 per share. For intraday equity trading, the applicable STT is 0.020%.

SST = 0.020%*60*100 = INR 1.20

On the other hand, the SST for futures and options is 0.02%. Here, Ms Ananya buys ten lots of PQR futures at INR 2500 and sells at INR 3000. The lot size is 100 shares. SST = 0.02%*3000*10*100 = INR 600

Features of Securities Transaction Tax

The main purpose of STT was to limit the tendency of investors to evade taxes on capital gains. Some of the features related to Securities Transaction Tax are given below:

  • STT is a tax that is directly levied on the trade of securities that are listed on the stock exchanges of India. It is like the Tax Collected at Source.
  • The STT is responsible for collecting revenue and keeping a check and balance on each and every transaction of stock exchanges.
  • The STT rates levied upon securities depend upon the kind of transaction the investors are trading. The rate is also influenced by the purchases and sales of securities.
  • The Central Government of India is responsible to fix STT rates.
  • Securities Transaction Tax is not applicable for any off-market transactions.
  • The STT is levied upon futures and options only on the sell side.
  • Listed brokers or any prescribed persons are responsible for collecting STT from the investors.

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Levy of Securities Transaction Tax

The Security Transaction Tax Act regulates STT on every purchase and sale of securities that are listed on the Stock exchanges. The table given below shows taxable securities, the rate, and by whom it is payable as per CH. VII OF FINANCE (NO. 2) ACT, 2004 Section – 98, charges Securities Transaction Tax:

Taxable Securities

Type of Transaction

Rate

Payable by

Derivative:

  • Option in security
  • When the option is exercised
  • Futures in securities
  • Sale
  • Sale
  • Sale
  • 0.5%
  • 0.125%
  • 0.01%
  • Seller
  • Purchaser
  • Seller

Futures in security

Sale

0.1%

Seller

Delivery based equity

Purchase

0.10%

Purchaser

Delivery based equity

Sale

0.1%

Seller

Delivery based unit of oriented mutual fund

Sale

0.001%

Seller

Unlisted shares under an offer for sale to the public included in IPO

Sale

0.2%

Seller

Units of Equity Oriented Mutual Funds

Purchase

Nil

Purchaser

Exchange Traded Funds

Sale

0.001

Seller

Equity share in a company or a unit of an equity oriented fund

Sale

0.025

Seller

How do you Calculate Securities Transaction Tax?

STT is a direct tax that is levied on every purchase and sale of a security that is listed on recognized exchanges in India. STT is charged when stocks are sold in the cash segment for intraday trades. It is calculated by multiplying the rate at which the stock is sold and the number of shares.

When is Securities Transaction Tax levied?

The security Transaction tax is a direct tax that is levied on the securities that are listed on the Stock Exchanges of India. STT is charged on every transaction, which is a successful sale and purchase of the securities. The important point to be taken into consideration about STT is that it will only apply to those transactions that are made through recognized stock exchanges in the country and those transactions which are made on unrecognized stock exchanges are not covered under STT.

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Relevance of STT with Income Tax

An assessee who is buying and purchasing securities should know whether he is investing for investment purposes or is trading for business purposes, the tax chargeable on share market trading depends upon the nature of the transaction.

STT can be taken into account while assessing the income for tax if these securities transactions are included in (a) Income from Capital Gains or (b) Profits and Gain of Business or Profession.

Income from Capital Gains

  • If the person is either salaried or is involved in some other business and his main business isn’t related to trading in securities or if the person invested money solely for investment purposes. Then such gains are to be taxed under the “Income from Capital Gains” head.
  • For Example, Gains are classified into two heads Short Term Capital Gains or Long Term Capital Gains. If the holding period is less than 1 year then the gains are called Short Term Capital Gains and if the holding period is more than or equal to 1 year then they are called Long Term Capital Gains. Any equity share, which has been sold through a recognized stock exchange and on which STT has been paid and if it comes under LTCG, it’ll be taxed at 10% whereas, in the case of STCG of such shares, the gains shall be taxed only at 15%, plus surcharge and education cess under section 111A of the Act.[S1] [S2] You are obligated to pay Income Tax on any such capital gain.

Income from Business by trading in stocks

Under this head if a trader has a business income through trading, the income is taxable under the specified income tax rate under the head profits and gains from business or profession. While trading the person has paid STT he can claim the amount paid as a deduction as per section 36 of the Income Tax.

What is the Major Difference Between Securities Transaction Tax (STT) and Commodities Transaction Tax (CTT)?

Taxes are a part of trading, and a source of income for the government to run the country. Income from trading is considered business income as per the Income Tax Act. A trader or investor usually buys or sells stocks, securities listed on stock exchanges whereas commodities on the commodity exchanges, etc.

The table shows the difference between Securities Transaction Tax & Commodities Transaction Tax:

Securities Transaction tax

Commodity Transaction Tax

It is a kind of tax that is levied on the purchase and sale of securities.

It is a kind of tax that is imposed on exchange-traded commodities and their derivatives.

It was introduced by the Government of India in 2004 by amending the Finance Act.

It was introduced in the Finance Act 2013.

The objective of this tax was to curb tax evasion.

The purpose to bring this tax was to prevent speculations of prices of specific commodities.

Working of STT
  • In India, the Securities Transaction Tax (STT) applies to the buying and selling of securities like stocks, mutual funds, and derivatives, introduced in 2004 to replace the previous "stamp duty" on securities transactions.
  • The STT is imposed on both the buyer and seller, with rates varying based on the security type and transaction nature. For instance, the STT rate for equity shares is 0.1%, while for equity-oriented mutual funds, it is 0.001%.
  • The stock exchange deducts and pays the STT on behalf of buyers and sellers, simplifying compliance. The tax also extends to off-market or foreign exchange transactions.
  • While the primary aim is revenue generation, the STT serves as a deterrent to speculative trading, increasing trading costs. Critics argue it might impact market liquidity by discouraging certain securities' trading or widening bid-ask spreads.

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Impact of STT on Investors

The Securities Transaction Tax (STT) in India affects investors by adding costs to buying and selling securities like stocks, mutual funds, and derivatives. Here's how it can impact them:

  • Increased Transaction Costs: The STT raises trading costs, reducing returns for frequent or short-term traders. This challenges investors in earning profits and influences their investment choices.
  • Reduced Liquidity: Higher STT rates may deter some investors, reducing market liquidity. This avoidance can affect overall trading volumes and market efficiency.
  • Impact on Investment Strategy: Investors may alter their strategies due to the STT, favoring securities with lower tax rates or shifting focus to long-term investments. This can unevenly distribute investment capital, affecting overall market dynamics.
  • Distortion in Pricing: Securities subject to higher STT rates may be undervalued, impacting overall market efficiency and creating pricing distortions as investors may be less willing to pay a premium for these securities.

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Conclusion

Past practices of tax evasion led to the concept of Security Transaction Tax which was introduced to India in 2004. The Central Government of India levies Security Transaction Tax on every sale and purchase of securities listed on the stock exchanges of India. STT is a direct tax that ensures that tax is collected efficiently on transactions in the Financial Market.

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Security Transaction Tax FAQs

Security Transaction Tax (STT) is a tax that is levied on security transactions done on the listed stock exchanges around the world.

It is calculated by multiplying the rate at which the stock is sold/bought, the price, and the number of shares.STT= (STT rate) X (selling price) X (lots) X (lot size of NIFTY)

Direct tax. STT is a tax that is directly levied on the trade of securities that are listed on the stock exchanges of India. It is like the Tax Collected at Source.

STT is imposed upon the buying and selling of security and in case of purchase, the buyer will have to pay STT and in case of a sale, the seller will have to pay STT.

The tax chargeable on share market trading depends upon the nature of the transaction. STT can be taken into account while assessing the income for tax if these securities transactions are included in (a) Income from Capital Gains or (b) Profits and Gain of Business or Profession.
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