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18 Jul, 2024
5 mins read
Many traders often overlook Securities Transaction Tax (STT) despite being a crucial aspect of stock trading. While capital gains tax is more widely known, STT plays a significant role in the financial landscape. This tax is levied on securities transactions, and its implications can impact trading decisions. Understanding STT charges and provisions is essential for every trader navigating the financial markets. Check out this blog to learn the nuances of STT, tax rates, key features, and examples.
Securities Transaction Tax (STT) is a direct tax levied on the value of transactions made through recognised stock exchanges in India. It is levied on purchasing and selling securities such as stocks, derivatives, bonds, debentures, and equity-oriented mutual funds.
It was designed to generate revenue for the government and to discourage speculative and short-term trading activities by making them relatively more expensive. The Security Transaction Tax rate is set by the government and varies depending on the type of securities and the nature of the transaction. Traders need to understand the concept and impact of STT as it can directly affect the cost and profitability of their trades in the financial markets.
As mentioned above, the Securities Transaction Tax is levied by imposing a tax on every purchase and sale of securities made through recognised stock exchanges.
STT was first introduced in 2004 and revised multiple times over the years. It is applied in both buy and sell transactions based on prevailing STT rates. STT is charged on both the buy and sell sides for equity delivery transactions, while intraday and derivative trading is charged on the sell side.
The STT is collected by recognised stock exchanges, mutual funds, or lead merchant bankers (for IPOs) and remitted to the government within the 7th of the following month. Failure to remit or collect the STT as per the applicable rates can result in a levy of interest, penalty or both.
The rates of STT as of July 2024 are-.
|
Order Type |
STT Rate |
|
Intraday |
0.025% on the sell side |
|
Delivery |
0.1% on both the buy and sell-side |
|
Options |
0.125% of the intrinsic value on exercised options (buy) |
|
0.0625% of the premium for shorted options |
|
|
Futures |
0.0125% on the sell side |
|
Sale of unlisted IPO shares |
0.2% of the sale price |
|
Sale of Equity Mutual Fund Units |
0.001% of the sale price |
The securities transaction tax was introduced in 2004 to replace the stamp duty and tax securities transactions at applicable rates. A few key features of Securities Transaction Tax include,
STT is easy to compute and apply based on predetermined rates.
STT is levied in real time and collected at the time of transactions, which can reduce errors and delays.
It was introduced to reduce tax evasion and promote fairness and transparency in market transactions.
After considering the meaning and applicable rates on different types of securities, let us consider the following examples to understand the levy of STT in a simplified manner.
A trader buys 1,000 shares of a company at Rs.100 per share and later sells them at Rs.120 per share.
The Transaction Value of purchase tranasaction = 1,000 shares × Rs.100 = Rs.1,00,000
Applicable STT Rate 0.1% on purchase price
STT Calculation = Rs.100,000 × 0.1% = Rs.100
Transaction Value of sale transactions = 1,000 shares × Rs.120 = Rs.1,20,000
Applicable STT Rate = 0.1% on sale
STT Calculation = Rs.1,20,000 × 0.1% = Rs.120
A trader buys 500 shares of a company at Rs 40 and sells them on the same day at Rs.50 per share.
STT on Purchase order - No STT on purchase for intraday transactions.
Transaction Value of sale transactions = 500 shares × Rs.50 = Rs.25,000
Applicable STT Rate = 0.025% on sale
STT Calculation = Rs.25,000 × 0.025% = Rs.6.25
A trader sells an option contract with a premium of Rs.200, and the option is not exercised.
Transaction Value, i.e., Option premium = Rs.200
STT Rate = 0.0625% on option premium
STT Calculation = Rs.200 × 0.0625% = Rs.0.125
A trader sells a futures contract at Rs.1,50,000.
Transaction Value = Rs.1,50,000
STT Rate = 0.0125% on sale
STT Calculation = Rs.150,000 × 0.0125% = Rs.18.75
Securities Transaction Tax is a key concept in the securities market and a common charge when trading various types of securities. It is a significant cost to the overall portfolio and has a direct impact on portfolio returns. Therefore, it is important to understand the levy of STT and the security transaction tax rate for its effective implementation.
The tax rate of Securities Transaction Tax (STT) varies depending on the type of transaction. The STT rate for delivery-based equity transactions is 0.1% on both purchase and sale, while STT is 0.025% on the selling side for intraday trades. Similarly, STT applicable on derivatives ranges from 0.0125% to 0.125% based on the specific derivative type and transaction nature.
STT was introduced to generate revenue for the government and discourage speculative and short-term trading by increasing transaction costs.
Securities Transaction Tax (STT) is calculated as a percentage of the transaction value, and the rate varies depending on the type of security and transaction.
STT is calculated as a percentage of the price of the security traded and is deducted automatically by the stock exchange or designated entities at the time of transaction execution and remitted to the government by the 7th of the following month.
No, the Securities Transaction Tax (STT) is non-refundable. Once paid, it cannot be reclaimed, but it can be shown as an expense if income from trading is shown as business income.
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