What is Securities Transaction Tax (STT)?Securities Transaction Tax (STT) is levied on every purchase and sale of securities that are listed on the stock exchanges. It is a tax payable by investors and traders to the central government and therefore is categorised as a regulatory charge.
Why was Securities Transaction Tax Introduced?Before the introduction of STT, investors used to evade capital gain tax by showing fictitious losses on their investments. To avoid such practices, the Government of India introduced Securities Transaction Tax (STT) in the Union Budget 2004. Through this practice, an investor will not be able to avoid paying taxes as it is levied at source. While STT was introduced, long term capital gain tax was abolished and was reintroduced in 2019. The STT is charged on stocks, derivatives and equity mutual funds. It is important to note that broker collects STT when you execute a trade. It is applied on the value of transaction placed by the traders or investor. You can look at a clear break-up of taxes in the contract notes issued by your broker.
How is STT Charged?
For Cash Market (EQ) Transactions:STT on Intraday Trades STT is charged on the sell side of the transaction at 0.025%. Let us understand this with an example: A trader buys 100 shares of Tata Chemicals Ltd. for Rs 1,000 each at 9:30 AM on Monday and sells them off at Rs 1,005 at 3:15 PM. Here, STT will be Rs 25.13 calculated as (Rs 1,005 x 100 x 0.025% = Rs. 25.13) STT on Delivery Trades STT is charged on both legs, i.e. Buy & Sell side of the delivery transaction. Let us understand this with an example: Trader buys 100 shares of Tata Chemicals Ltd. at Rs 1,000 each on 27th October 2021 and sells the same at Rs 1,010 on 30th October 2021. STT will be Rs. 100 on the buy side calculated at 0.1% on (Rs 1,000 x 100 x 0.1% = Rs. 100) & Rs. 101 on the sell side calculate at (0.1% on Rs. 1,010 x 100 x 0.1% = Rs.101). So the total STT will be Rs 201. An important benefit of the STT is that, if STT is paid on transactions previously, capital gains on securities transactions gets charged at a preferential rate.
- In case of short term capital gains, a tax of 15% is applicable.
- In case of long term capital gains, the tax rate is 0%. This is long terms capital gains is exempt from tax for transactions where STT is previously paid.