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Securities Transaction Tax (STT):  Tax Rates, levy, Applicability and securities

In the intricate web of India's financial markets, where every transaction holds implications for investors, traders, and the broader economy, the Securities Transaction Tax (STT) emerges as a crucial factor. Introduced in 2004 with the aim of enhancing market transparency and generating revenue for the government, STT has become an integral aspect of securities trading.

Evolution of Securities Transaction Tax

The genesis of STT in India can be traced back to the year 2004 when Finance Minister P. Chidambaram introduced this direct tax. The initial structure involved a 0.1% tax on the total transaction value for delivery-based equity trading. However, recognizing the need for adjustments to align with market dynamics, subsequent amendments have been made to the rates and structures of STT.

What is Securities Transaction Tax (STT)?

Securities Transaction Tax (STT) is a direct tax levied on the purchase and sale of securities in designated financial markets. This tax is aimed at generating revenue for the government, regulating market activities, and discouraging certain types of speculative trading.

What does security mean under Securities Transaction Tax?

In the context of Securities Transaction Tax (STT), the term "security" refers to various financial instruments that can be bought or sold in the financial markets. These instruments represent ownership or creditor relationships, and they can include:

Equity Shares: Ownership shares in a company that represents a claim on the part of the company's assets and earnings.

Bonds: Debt securities that represent a loan made by an investor to a borrower (typically a government or corporation).

Derivatives: Financial contracts whose value is derived from the performance of an underlying asset, index, or rate.

Mutual Fund Units: Investment vehicles that pool money from multiple investors to invest in a diversified portfolio of stocks, bonds, or other securities.

Government Securities: Debt instruments issued by the government to raise funds; they include treasury bills, bonds, and other government-backed securities.

Securitized Debt Instruments: These are financial instruments created by pooling various types of debt and then selling the repackaged debt to investors.

Attributes of Securities Transaction Tax (STT):

To complete the Udyog Aadhaar registration process, you typically need the following documents:

1. Transaction-Based Tax: STT is levied on the transaction value of securities, making it a transaction-based tax. It is not calculated on profits or income but on the total value of the securities transaction.

2. Variety of Securities: STT is applicable to a wide range of securities, including equity shares, bonds, derivatives, mutual fund units, and government securities. This comprehensive coverage reflects the diverse nature of financial instruments in the market.

3. Regulatory Tool: STT serves as a regulatory tool to discourage certain trading behaviors and promote market stability. It aims to deter excessive and speculative trading, particularly in the short term.

4. Government Revenue Generation: One of the primary objectives of STT is to generate revenue for the government. The tax collected contributes to the national exchequer and helps finance public initiatives and services.

5. Elimination of Tax Avoidance: STT is designed to prevent tax evasion by ensuring that a tax is paid at the time of the securities transaction itself. This helps in reducing the scope of tax avoidance strategies.

6. Rates and Structures: The rates and structures of STT can vary based on the type of security and the nature of the transaction. Rates are periodically reviewed and adjusted by regulatory authorities to align with market dynamics.

7. Transparency in Transactions: By applying a tax directly to transactions, STT enhances transparency in the financial markets. It provides a clear and visible cost associated with buying or selling securities.

8. Impact on Market Behavior: STT influences market behavior by making certain types of trading, particularly short-term and high-frequency trading, more expensive. This, in turn, encourages investors to adopt a more long-term approach.

9. Applicability to Recognized Stock Exchanges: STT is applicable to transactions carried out on recognized stock exchanges. Transactions conducted on non-recognized exchanges are not subject to STT.

10. Distinct from Income Tax:  STT is separate from income tax. While income tax is calculated based on profits and earnings, STT is specifically focused on the value of securities transactions.

When is Securities Transaction Tax (STT) levied?

Securities Transaction Tax (STT) is levied at the time of specific securities transactions in India. The timing of the levy depends on the type of transaction and the nature of the security involved. Here are the instances when STT is typically levied:

1. Equity Shares (Delivery-Based):  STT is levied at the time of both the purchase and sale of equity shares in delivery-based transactions. The tax is calculated as a percentage of the total transaction value.

2. Mutual Fund Units (Equity Oriented): STT is applicable to the sale of equity-oriented mutual fund units. It is charged on the total price at which each unit is sold.

3. Option in Security Derivatives: STT is levied when selling an option in security derivatives. The tax is calculated on the total value of the option premium.

4. Exercise of Option in Security Derivatives: When the option in security derivatives is exercised, STT is charged on the total value of the settlement price. The tax is borne by the buyer.

5. Futures in Option Derivatives: STT is applicable to the sale of futures in option derivatives. It is charged on the total value at which the futures are traded.

6. Equity Funds or Oriented Mutual Funds (Non-Delivery): STT is levied at the time of selling equity funds or oriented mutual funds on a recognized stock exchange, but not by actual delivery or transfer. It is charged on the total amount at which the equity share or unit is sold.

7. Exchange Traded Funds (ETFs): STT is applicable to the sale of a unit through Exchange Traded Funds (ETFs) when equity funds are changed into mutual funds. It is charged on the total amount at which the unit is sold.

8. Unlisted Shares in IPO: STT is levied when selling unlisted shares to the public, and these shares have been included in an Initial Public Offering (IPO) to be listed on stock exchanges.

STT is designed to be collected at the time of the transaction to ensure immediate compliance.

Securities Under the Securities Contract Act
Securities Under the Securities Contract Act Rate on Each Security
STT Payer
Total Value for STT
Purchase of Delivery-Based Equity Shares
0.1%
Buyer
Total price of purchased equity share
Sale of Delivery-Based Equity Shares
0.1%
Seller
Total price of sold equity share
Sale of Delivery-Based Mutual Fund Units
0.01%
Seller
Total price of each unit sold
Sale of Option in Security Derivatives
0.017%
Seller
Total value of option premium
Exercise of Option in Security Derivatives
0.125%
Buyer
Total value of settlement price
Sale of Futures in Option Derivatives
0.01%
Seller
Total value at which futures are traded
Sale of Equity shares or Oriented Mutual Fund in recognized stock exchange otherwise than by actual delivery or transfer and intra day traded shares
0.025%
Seller
Total amount at which share/unit is sold
Sale of ETFs Converted from Equity Funds
0.001%
Seller
Total amount at which unit is sold
Sale of Unlisted Shares in IPO
0.2%
Seller
Total amount at which shares are sold
Purchase of Unit in Mutual Funds (Equity)
Nil
Buyer
Not Applicable

What is the STT rate when Derivatives are physically settled?

Securities Transaction Tax (STT) on the physical delivery of derivatives, a clarification by the Central Board of Direct Taxes (CBDT) dated 27 August 2018, addressed concerns arising from derivative contracts settled through the physical delivery of shares. Normally, derivative contracts are cash-settled, attracting a 0.001 percent STT. However, when derivative contracts involve the physical delivery of shares, creating a similarity to equity share transactions, the CBDT stated that the STT rate applicable to delivery-based equity transactions (0.1 percent) would also apply to such derivative transactions. This clarification followed a situation where stock exchanges imposed a 0.1 percent STT on the physical delivery of derivatives, prompting a petition by the Association of National Exchange Members of India (ANMI) before the Bombay High Court to address this discrepancy. The clarification aimed to align the STT rates for the physical delivery of derivatives with those of equity transactions.

Illustration

Suppose Investor A purchases 100 shares of XYZ Company at Rs. 150 per share on a recognized stock exchange. Later, Investor A sells the same 100 shares of XYZ Company at Rs. 160 per share.

Purchase Price per Share = Rs. 150

Number of Shares Purchased = 100

Total Purchase Value = (150 * 100) = Rs. 15,000

 

STT on Purchase (0.1% of Total Purchase Value) = 0.001 * Rs. 15,000 = Rs. 15

Investor A pays Rs. 15 as STT at the time of purchasing the shares.

Sale Transaction:

Sale Price per Share = Rs. 160

Number of Shares Sold = 100

Total Sale Value = (160 * 100) = Rs. 16,000

 

STT on Sale (0.1% of Total Sale Value) = 0.001 * Rs. 16,000 = Rs. 16

Investor A pays Rs. 16 as STT at the time of selling the shares.

Net Gain/Loss Calculation:

Total Gain from the Transaction = Total Sale Value - Total Purchase Value

= Rs. 16,000 - Rs. 15,000 = Rs. 1,000

Sale Transaction:

Sale Price per Share = Rs. 160

Number of Shares Sold = 100

Total Sale Value = (160 * 100) = Rs. 16,000

STT on Sale (0.1% of Total Sale Value) = 0.001 * Rs. 16,000 = Rs. 16

Investor A pays Rs. 16 as STT at the time of selling the shares.

Net Gain/Loss Calculation:

Total Gain from the Transaction = Total Sale Value - Total Purchase Value

= Rs. 16,000 - Rs. 15,000 = Rs. 1,000

Net Gain after Deducting STT:

Net Gain = Total Gain - (STT on Purchase + STT on Sale)

= Rs. 1,000 - (Rs. 15 + Rs. 16) = Rs. 969

In this example, Investor A incurs STT at the rate of 0.1% on both the purchase and sale of equity shares. The STT is paid directly at the time of the transaction. The net gain after deducting STT reflects the actual profit considering the impact of STT on the overall transaction.

Frequently asked questions

Q

 1. What is Securities Transaction Tax (STT)?

A

STT is a tax levied in India on the purchase and sale of securities, including stocks, derivatives, mutual fund units, and government securities, carried out on recognized stock exchanges.

Q

2. How is STT calculated for equity shares?

A

For delivery-based equity transactions, STT is calculated at 0.1% of the total price on both purchase and sale. It is paid by the buyer for purchases and by the seller for sales.

Q

3. Are all securities transactions subject to STT?

A

No, STT is not applicable to all transactions. It is levied on transactions conducted on recognized stock exchanges, and certain instruments like commodities and currencies are exempt.

Q

4. When is STT payable for derivative contracts?

A

STT is generally applicable to derivative contracts settled in cash. However, for physically settled derivatives involving the delivery of shares, the STT rate is aligned with delivery-based equity transactions.

Q

5. Is STT applicable to mutual fund transactions?

A

Yes, STT is applicable to mutual fund transactions. The rate varies depending on factors such as whether the transaction involves delivery-based equity-oriented funds.

Q

6. Who is responsible for paying STT on securities transactions?

A

The responsibility for paying STT depends on the nature of the transaction. For equity shares, the buyer pays STT on purchase, and the seller pays on sale. In derivative transactions, it may be paid by the buyer or seller depending on the scenario.

Q

7. What is the purpose of STT?

A

STT serves multiple purposes, including regulating securities markets, discouraging certain trading practices, promoting market stability, and generating revenue for the government.

Q

8. Are there exemptions from STT?

A

While STT is applicable to most securities transactions on recognized stock exchanges, certain instruments like commodities and currencies are exempt. Additionally, specific transactions may be exempt based on regulatory guidelines.

Q

9. How is STT reported in Income Tax Returns (ITR)?

A

STT is not directly reported in ITR. Instead, capital gains from securities transactions, on which STT may have been paid, are reported in relevant sections of the ITR form.

Q

10. Can STT be avoided or minimized?

A

STT is a mandatory tax on eligible securities transactions, and attempts to avoid or minimize it could lead to legal consequences. It is essential to understand and comply with the prevailing tax regulations.

Prachi Jain

Chartered Accountant

Prachi Jain is a Chartered Accountant with a passion for simplifying finance and tax-related matters through her insightful and informative blogs. With a background in finance and a deep understanding of tax regulations, Prachi has established herself as a trusted source of financial wisdom. Prachi is committed to empowering her readers with the knowledge they need to make informed financial decisions. Her expertise and dedication shine through in every blog post, helping her audience navigate the intricacies of finance and taxes with confidence. Follow Prachi Jain's blog for practical insights and guidance on managing your finances effectively.