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What is Securities Transaction Tax?
Securities Transaction Tax(STT) is a tax levied on the purchase or sale of securities listed in the stock market in India. The tax came into effect from 1st October 2004. The paramount reason for the introduction of this tax was to curb the tax evasion on capital gains while trading in securities. The Securities Transaction Tax is a type of turnover tax where the investor pays a small tax on the share transaction. The Government decides the rate of STT.
Application of Securities Transaction Tax
The Securities Transaction Tax is applicable on the following transactions as per the Securities Contracts Act
- Government securities which are of the nature of equity
- Equity oriented mutual funds
- Rights or interests in securities
- Debt instruments that are securitised
- Derivatives
- Shares
- Bonds and debentures
- Debenture stock or other marketable securities
Securities Transaction in Relation to the Income Tax Act,1961
According to the Income Tax Act,1961, the STT may be treated as a tax that can be categorized as per the activity on which it is levied. If it is treated as investments then it is taxable under the head of Income from capital gains. On the other hand, if it is treated as a business activity then it is taxable under the head Income for business and profession.
The income may be taxed as short term or long term capital gain depending upon the period of holding of such investments. If the securities are held for less than one year and sold on the stock exchange with STT paid on them, then the income is taxed at the rate of 15%. If the investment is held for more than one year and sold on the stock exchange with STT paid on them, then the income is taxed at the rate of 10% which is long term capital gain.
If income is taxed under the head Income from Business and Profession, then income would be taxed as per the regular rates specified in the Income Tax Act,1961 but the STT paid on them will be allowed as deduction under Section 36 of the Income Tax Act,1961.
Rates of Securities Transaction Tax
| Particulars | STT Rate | Value on which STT is paid |
|---|---|---|
Purchase or sale of equity shares | 0.1% | Buy or Sale value |
Purchase of equity oriented Mutual Fund | 0.1% | Buy value |
Seller of equity oriented mutual fund | 0.0025% | Sale value of fund |
Option contract seller | 0.017% | Value of option premium received |
Option contract seller which is exercised by the buyer | 0.125% | Value of settlement price received on sale of options contract |
Futures | 0.001% | Value of sale of futures |
Mutual Fund | 0.025% | Value of sale of mutual fund |
STT on Physical Delivery of Derivatives
In a case under the Bombay High Court, it was declared that the STT on physical delivery of derivatives will be the same as that of equity share transactions.
The settlement of derivatives in India is through cash and both parties earn profit in the nature of cash, therefore STT of 0.001% is levied on such transactions.
A SEBI circular stated that the clearance of a derivatives transaction will be done by physical delivery of shares against cash. The court stated that the above is an equity transaction and thus will attract an STT of 0.1%.
Calculation of Securities Transaction Tax
Ms Sandhya is an active investor in the stock market. She purchases 1000 shares of P Ltd. at the rate of Rs. 50 per share and sells the shares at the rate of Rs. 70 per share. Calculate STT.
Since STT applicable for trading equity trading is 0.025%,
STT = 0.025*70*1000= Rs.17.50
If Ms Sandhya buys 5 lots of futures of lot size 100 shares of P ltd at Rs.3,000 and sells it at Rs. 3,050. Calculate STT.
STT = 0.01%*3050*70*100 = Rs.152.50
Features of Securities Transaction Tax
- STT is a direct tax and not very complicated.
- It is levied when the transactions take through the recognised stock exchange.
- For the clearing member, the STT is the total of STT paid by the clearing members.
- According to the STT rules, every future is valued at the actual traded price and every option is calculated at a premium.
- STT is charged on all sell transactions of options and futures.
Advantages of Securities Transaction Tax
After the levy of Securities Transaction Tax, the Government has seen an upward movement in the figure of revenue collected from taxpayers. This has reduced the evasion of capital gains tax in the case of the securities which are traded on the stock exchange.
The trading in the stock market was earlier a less used source by the investors. As the stock market operations grew and became more user friendly, the investors have traded a large volume of securities and thus by the implication of STT, the revenue from the tax is collected.
4 Major Takeaways For Securities Transaction Tax
- It is a direct tax paid on the transactions done in securities on a recognised stock exchange.
- Off-market transactions are not covered under STT
- The rate of STT is decided by the government and depends upon the type of securities.
- For delivery based equity transactions the STT for sale and purchase is charged at 0.1% of turnover and for intraday, the STT charged only on sale which is 0.025%.
FAQs
1. Is STT allowed as an expense for individuals?
No, STT is not an allowable expense.
2. What is the formula for STT calculation?
STT = STT rate *price of each share bought/sold*number of shares
3. Is STT a direct or indirect tax?
STT is a form of direct tax.
4. What is STT on intraday transactions?
The STT on intraday transactions is 0.025%
5. What is the rate of STT for trading in equity shares?
There is no STT levied on equity shares and equity mutual funds. However, 0.1% of STT is levied on the total value of delivery based sales or purchase of shares.