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What is Securities Transaction Tax?

IndianMoney.com Research Team | Posted On Monday, February 03,2020, 01:06 PM

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What is Securities Transaction Tax?

 

 

Securities Transaction Tax (STT) is a direct tax levied by the central government during the purchase and sale of securities listed on the stock exchange. Securities are investments like equities, shares, options, bonds and so on. Based on the type of security traded, STT rate changes. The nature of the transaction (buy/sell) also impacts the rate. This tax was introduced in 2004, by the then finance minister P Chidambaram. The main purpose of this tax was to overcome tax evasion in case of capital gains.

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What is Securities Transaction Tax?

Features of Securities Transaction Tax

Some of the unique features of STT are:

  • It is applicable on all types of sell transactions that is options and futures.
  • STT calculation is done in the following ways: Future trade will be valued at the actual traded price, options trade will be valued at a premium.
  • A clearing member has to pay STT equivalent to the sum total of STT taxes of all trading members operating under him.
  • It is a simple direct tax.
  • It is levied and collected directly by the central government of India.
  • It is not applicable on off-market transactions.

See Also: What are the Steps Involved in Tax Planning?

Securities Transactions Tax Rate in India

As mentioned earlier, STT rates depend on the type of securities and the type of transactions. Here is a table mentioning the STT rates applicable on each type of securities:

S.NO

Type of Securities

To Be Paid By

STT Rate

1.

Delivery based purchase of equity shares

purchaser

0.100%

2.

Delivery based sale of an equity share

seller

0.100%

3.

Delivery based sale of a unit of mutual fund

seller

0.001%

4.

Derivative sale of an option in securities

seller

0.017%

5.

Derivative sale of future in securities

seller

0.010%

6.

Exchange traded funds

seller

0.001%

7.

Derivative sale of an option in securities where option is exercised

purchaser

0.125%

8.

Sale of equity share/unit of equity mutual fund/intraday trading

seller

0.025%

9.

Sale of unlisted shares under an offer and subsequently listed in stock exchanges

seller

0.200%

The following types of securities are taxed under STT Act:

  • Mutual funds that are based on equity trading.
  • Derivatives traded in the market.
  • Shares, bonds, and debentures.
  • Government securities similar to equity.
  • Rights or interests in securities.
  • Units issued by any collective investment scheme to customers.

See Also: Last Minute Tax Planning: What You Should Do?

Securities Transaction Tax and Income Tax

Income from Capital Gains: When a salaried or self-employed invests in stocks for the purpose of investment and not as a profession, then income tax is levied on capital gains. Capital gain/loss is the difference between the buying price and selling price of the instrument. If the stock is held for less than 12 months, then gains are short term capital gains and taxed at 15%. Whereas, if the stock is held for more than 12 months, it is called long term capital gain and is taxed at 10% on LTCG above Rs 1 Lakh.

Income From Trading as a Profession: When trading is a profession, then gain or loss from such activities is grouped under business income. It is taxed at normal income tax rates. Under section 36 of the income tax act, STT paid on such income can be claimed as a deduction.

Is STT Refundable?

STT is refundable only if capital gains from share market are grouped under “business income”. The STT paid will be considered as expenditure against the income from trading of securities. In this case, you can claim a deduction and STT is refunded. Investors who claim profit as capital gains, will not have access to this benefit.

Example of STT

Intraday STT:

An investor purchases 500 shares worth Rs 10,000 at Rs 20 each and sells at Rs 30 each on the same day. The intraday STT rate applicable is 0.025%.

STT = 0.025*30*500=Rs 375.

See Also: All You Must Know About Tax Planning

Futures and Options:

A trader buys 5 lots of nifty futures at Rs 5,000 and sells at Rs 5,010. The lot size of nifty is 50. STT for futures and options is 0.01%.

STT= 0.01*5010*50*5=Rs 125.25.

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