What is STT (Securities Transaction Tax)?

What is STT?

STT stands for Securities Transaction Tax. It is designed to generate revenue from securities trading. STT is charged on the securities' transaction value traded on the stock exchanges. The tax is charged to the various financial instruments. In this article, we learn everything you need to know about Securities Transaction Tax (STT).

STT falls under the direct taxation. It is levied on securities trading in India. The taxation was introduced in 2004, and this year marks two decades of it. It was introduced to curb speculative trading and generate revenue from the Indian financial market. STT is charged on the transaction value of securities traded on the Indian stock exchange. It includes - derivates, shares, and equity-oriented mutual funds. Let us understand it with an example.

If you sell 100 shares of a company at Rs 100 per share, the transaction value is Rs 10,000. If the STT rate for equity delivery is 0.1%, you will pay an STT of Rs 10. You should note that the tax you pay is irrespective of the fact that you make a profit or loss from the sale of shares. It is similar to the Tax Deducted at Source (TDS).

Features of STT

Here are the key features of STT:

• Direct Tax: STT is a direct tax, meaning it is imposed directly on the investor (taxpayer).

• Transaction-Based: It is levied on every sale of securities, whether it is shares, derivatives, or equity-oriented mutual funds.

• Uniform Rate: While there are different rates for different security types, the tax is applied uniformly to all investors.

• Collected at Source: The stock exchange collects STT on behalf of the government, ensuring efficient collection.

• Revenue Generation: STT is a significant source of revenue for the government.

• Curbs Speculation: By imposing a tax on every transaction, STT can discourage excessive speculation in the market.  

How is STT calculated?

As mentioned earlier, you need to pay STT on the sale and purchase of securities listed on the Indian stock exchange.

Since STT is charged both on buy and sell transactions, the average price is calculated as below:

Average price = (Buy Qty * Buy Price) + (Sell Qty * Sell Price) / (Buy Qty + Sell Qty)

Let us understand how STT is charged on intraday and delivery trade. Assume you make the following transactions:

• 1000 shares bought at Rs 100

• 1000 shares sold at Rs 105

• 500 shares bought at Rs 110 again

Using the above formula, the average price is calculated as below:

Average price = ( (1000 * 100) + (1000 * 105) + (500 * 110) ) / (1000 + 1000 + 500)

   = (260000) / (2500)

   = Rs 104

STT for intraday= 1000 (sell qty) * 104 * 0.025% (STT charge) = Rs 26

STT for delivery= 500 * 104 * 0.1% = Rs 52

Here is how rounding works with STT. If the portion of paise in STT is equal to or more than 50, it will be rounded off to the nearest rupee, and if it is less than 50, it will be rounded down to the nearest rupee. For instance, if the STT is Rs 500.60 it will be rounded off to Rs 501. If the STT is Rs 500.40 it will be rounded down to Rs 500.

When is Securities Transaction Tax levied?

STT is applicable every time you buy and sell equities listed on the Indian stock market. It is applicable the very moment a transaction occurs on the exchanges. When STT is charged instantly after a transaction in the stock market, the problems of non-payment/wrong payment get reduced to a minimum extent. Thus, the process of taxation of STT is quick, effective, and transparent. You can get an STT certificate at the end of a financial year.

STT rate in India

Below is the table showing STT charges (rates) for different securities:

*changing after 1 October 2024

In the budget 2024, the government has decided to increase the STT on F&O (derivate). The new rates will be applicable from 1 October 2024. The new rates will be as below:

• Futures up from 0.0125% to 0.02%

• Options up from 0.0625% to 0.1%

STT Exemption under Income Tax

Before the Union Budget 2018, there was a provision for STT exemption under Section 10(38) of the Income Tax Act. This meant that any long-term capital gains from the sale of shares or equity-oriented mutual funds on which STT was paid were exempt from taxation. However, this exemption was removed with effect from April 1, 2018. Currently, there is no specific exemption for STT under income tax.

Please note that if trading securities is your primary source of income, STT paid can be claimed as a business expense.

Conclusion

If you are an investor in the financial market, you must understand the STT. By being aware of the STT rates and the transaction nature subject to STT, investors can calculate transaction costs and comply with the regulations. We hope the article would have helped you in understanding STT.