Securities Transaction Tax (STT) is a tax levied by the Government of India on the sale and purchase of securities listed on recognized stock exchanges in India. Introduced in 2004, STT has become a key part of the Indian tax system, affecting investors who trade in stocks, mutual funds, and other financial instruments. While it may seem like a small percentage, STT can significantly impact your overall returns on investments. This blog will give you an in-depth understanding of STT, its application, and how it impacts your investments.
What is Securities Transaction Tax (STT)?
Securities Transaction Tax (STT) is a direct tax imposed on the transaction of securities such as stocks, bonds, derivatives, and mutual funds. This tax is applicable when securities are traded on recognized stock exchanges in India, such as the Bombay Stock Exchange (BSE) and National Stock Exchange (NSE).
The taxpayer for STT is generally the seller, but in some cases, both the buyer and seller may be liable. STT is applied on the transaction value and not on the capital gains derived from the transaction. Unlike other taxes, STT is paid at the time of the transaction and is collected by the stock exchange, which then deposits the tax with the Income Tax Department.
Types of Transactions on Which STT is Levied
STT is applicable on the following transactions related to securities:
Equity Shares:
STT is levied on the sale of equity shares listed on the stock exchange.
If you sell equity shares on a recognized stock exchange, you are required to pay STT at the applicable rate.
Derivatives (Futures & Options):
STT applies to transactions in futures and options contracts traded on recognized stock exchanges.
If you enter into futures and options contracts, whether buying or selling, STT will be applicable.
Mutual Funds:
STT is applicable on the sale of units of equity-oriented mutual funds (MFs) or equity ETFs (Exchange-Traded Funds).
It is not applicable to debt-oriented mutual funds or other fixed-income instruments.
Selling of Shares through Exchange:
If you sell shares via a recognized exchange, STT is applicable even in cases where you are transferring your shares between demat accounts, provided the transaction happens on the stock exchange.
Rates of Securities Transaction Tax (STT)
STT is levied at different rates depending on the type of transaction. The rates are typically low compared to other taxes like capital gains tax. Below are the current STT rates for various transactions:
Transaction Type | STT Rate |
Sale of Equity Shares (Delivery-based) | 0.1% on the transaction value |
Sale of Equity Shares (Non-delivery-based / Intraday) | 0.025% on the transaction value |
Sale of Derivatives (Futures and Options) | 0.05% on the transaction value |
Sale of Mutual Funds (Equity-oriented) | 0.001% on the transaction value |
Purchase of Equity Shares (Delivery-based) | No STT on purchase of shares |
Purchase of Mutual Funds (Equity-oriented) | No STT on purchase of mutual funds |
Note:
Delivery-based transactions are those where the securities are actually transferred and held in your demat account.
Non-delivery-based transactions (Intraday) occur when the securities are bought and sold on the same day and are not delivered to the buyer's demat account.
How Does STT Impact Your Capital Gains?
While STT is a separate tax from capital gains tax, it does affect the overall tax burden on your securities transactions.
Impact on Capital Gains Tax:
Short-Term Capital Gains (STCG): If you sell an equity share within one year of purchase and make a profit, you will be liable to pay short-term capital gains tax. While STT is deducted at the time of the transaction, you will still need to report your gains when filing your tax returns.
Rate of STCG on Equity Shares: 15% (plus applicable cess).
Rate of STCG on Debt Funds: As per the applicable tax slab of the investor (after one year of holding).
Long-Term Capital Gains (LTCG): If you sell an equity share after holding it for more than one year, the gains will be considered long-term. LTCG on equity shares exceeding ₹1 lakh in a financial year is taxed at 10% without indexation benefits.
LTCG on Debt Funds: Taxed at 20% with indexation benefits (if held for over 3 years).
While STT doesn’t directly impact your capital gains tax rate, it increases the effective cost of the transaction. It is important to factor in STT when calculating your net gains, as it will reduce the overall returns on your investment.
STT vs. Other Transaction Costs
STT is just one of the costs that investors incur while trading in securities. Other transaction costs include:
Brokerage Fees: Charges by the broker for executing buy or sell orders.
Transaction Fees: These may include exchange fees, clearing fees, and others.
GST (Goods and Services Tax): Applicable on the brokerage fees at a rate of 18%.
Stamp Duty: A state-level tax that applies to the transfer of shares.
While STT is levied by the government, brokerage fees, GST, and stamp duty are paid to brokers and respective authorities. Together, these charges can significantly reduce your returns.
Can STT Be Refunded?
No, STT is non-refundable. Once the tax is paid, it cannot be reversed or refunded, even if you incur a loss on the transaction. This is unlike capital gains tax, which can be adjusted against other capital gains or carried forward in case of a loss.
STT Exemptions: Are There Any?
There are certain cases where STT may not be applicable or may be reduced, including:
Transfer of Securities under a Will: If you inherit shares or securities, STT is not applicable at the time of transfer.
Sale of Certain Government Securities: STT does not apply to government securities and bonds.
Stock Market Speculation: In some cases, trading in stocks through options and futures may have lower STT rates than regular stock trading, benefiting those who engage in such strategies.
How to Account for STT in Your Tax Filing?
While STT is automatically deducted when you make a transaction, you still need to account for it when filing your Income Tax Return (ITR). The STT paid on the sale of shares and securities will be reflected in the Capital Gains Statement. Here's how to account for STT in your returns:
Short-Term Capital Gains (STCG) and Long-Term Capital Gains (LTCG) need to be calculated after considering STT.
Declare STT-Paid Transactions in Schedule CG (Capital Gains) of your ITR form.
Net Capital Gains after STT deductions will be subject to capital gains tax, which must be paid according to the applicable rates.
Make sure to keep track of your transaction details and STT paid for each transaction throughout the year.
Conclusion
Securities Transaction Tax (STT) is a crucial part of India’s taxation system for individuals who trade in the stock market, derivatives, and mutual funds. While it may seem like a small percentage, STT, when combined with other taxes, brokerage fees, and transaction costs, can impact your overall returns. By understanding the various types of transactions, tax rates, and implications, you can better plan your investments and ensure compliance with tax regulations.
If you’re an active trader or investor, ensure you track STT payments and report them properly in your tax returns. It is always advisable to stay informed about changes in tax laws to optimize your tax planning strategies. If you need further clarification on STT and its impact on your investments, consulting with a tax professional can help guide you in the right direction.
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