Securities Transaction Tax - All you need to know
In this article, we will see a deeper insight about STT – Securities Transaction Tax.
Trading in financial markets involves more than just buying and selling assets. It also entails understanding and navigating various tax implications that can impact your overall returns.
Taxes on trading encompass a range of levies imposed by governments on the transactions and profits generated from buying and selling securities, commodities, and other financial instruments. In many countries, including India and the United States, taxes on trading serve multiple purposes.
They not only contribute to government revenue but also help regulate market activities and ensure fairness. These taxes can vary widely based on factors such as the type of asset traded, the holding period of the investment, and the jurisdiction in which the trade occurs.
One of the most important tax is the STT – Securities Transaction Tax. Let’s uncover deeper insights into the intricacies of this tax to gain a comprehensive understanding.
What is Securities Transaction Tax (STT)?
STT stands for Securities Transaction Tax. It is a direct tax. This tax is levied in India on the value of securities transacted through recognized stock exchanges. That means whenever we buy or sell securities, tax is levied.
This tax is applicable to both equity and derivative instruments traded on stock exchanges in India. The purpose is to collect revenue for the government and is levied at the time of transaction itself.
- It was introduced in the 2004 Budget and implemented in October of the same year. Its primary objective is to curb tax evasion by taxing transactions at the source. It applies to a wide range of financial instruments including stocks, futures, options, mutual funds, and exchange-traded funds (ETFs).
- STT is required to be collected by a recognized stock exchange or by the prescribed person in the case of every mutual fund or the lead merchant banker in the case of an initial public offer, as the case may be, and subsequently payable to the Government on or before the 7th of the following month.
- In case the above persons fail to collect the taxes, they are still obliged the discharge an equivalent amount of tax to the credit of the Central Government within the 7th of the following month. Further, failure to collect or remit whatever has been collected will result in a levy of interest and penal consequences too.
How to calculate Securities Transaction Tax ?
Securities Transaction Tax (STT) in India is calculated based on the value of securities transacted. The rates vary depending on the type of transaction. The basic formula to calculate securities transaction tax is given below
STT Rate in Percentage x Price of each share bought/sold x Total no. of shares bought/sold
This tax applies to various financial instruments, including shares, derivatives, and equity-oriented mutual funds. Understanding how STT is levied provides valuable insights into its impact on investors, traders, and the broader financial market.
In the Union Budget 2024, Finance Minister Nirmala Sitharaman announced some revisions in the STT percentage. Look at the detailed charges of various instruments in the financial market.
| Transaction Type | Tax Rate |
|---|---|
| Equity Shares | |
| Delivery-based transactions | 0.1% of the transaction value |
| Non-delivery-based transactions (e.g., intra-day) | 0.025% of the transaction value |
| Derivatives (Futures and Options) | |
| Futures | 0.02% of the transaction value |
| Options (On Premium) | 0.1% of the premium value |
| Mutual Funds | |
| Purchase/Sale of units (Equity-oriented funds) | 0.001% of the transaction value |
| Purchase/Sale of units (Debt-oriented funds) | Exempt |
STT calculation with example
Let’s see how to calculate STT with an example under various segments
1. Intraday Trading – 0.025%
Assume you bought 100 shares of Company Z at ₹ 100 per share and sold the same shares the same day at ₹ 120 per share.
Total buy transaction value
= ₹ 100 * 100 = ₹ 10000
Total sell transaction value
= ₹ 120 * 100 = ₹ 12000
STT calculation :
No STT for buy side.
For sell side = ₹ 12000 * 0.025% = 12000 * 0.00025 = 3
So, the STT for your intraday trade would be ₹3.
2. Delivery Trading – 0.1%
Assume you bought 1 lot of company Z at ₹ 100 per share. 1 lot is equal to 300 shares. You sold the shares at ₹ 130 per share after a week.
Calculate the tax on Purchase:
- Number of Shares: 300 shares
- Purchase Price per Share: ₹ 100
- Total Purchase Price: 300 shares × ₹ 100 = ₹ 30,000
- STT on Purchase: 30,000 ×0.1% = ₹ 30,000 × 0.001 = ₹ 30
2. Calculate the tax on Sale:
- Number of Shares: 300 shares
- Sale Price per Share: ₹ 130
- Total Sale Price: 300 shares × ₹ 130 = ₹ 39,000
- STT on Sale: ₹ 39,000 × 0.1% = ₹ 39,000 × 0.001 = ₹ 39
Total STT:
Total STT = STT on Purchase + STT on Sale = ₹ 30 + ₹ 39 = ₹ 69
So, the total STT for your trade would be ₹ 69.
3. Futures Trading – 0.02%
The price of 1 unit is = ₹ 23,500
The price of 1 lot of Nifty futures contracts = ₹ 5, 87, 500
STT = 0.02% * ₹ 5, 87, 500 = ₹ 117.5
Premium at which the options were sold = ₹ 60
The total premium received = ₹ 1,500 (25 * ₹ 60)
STT on the premium for options that are shorted = 0.1% * ₹1,500 = ₹ 1.5
Conclusion
In conclusion, the Securities Transaction Tax (STT) is a crucial component of India’s financial regulatory framework, designed to streamline and simplify the taxation of securities transactions.
For investors, understanding and calculating STT is essential for accurate financial planning and investment strategies, ensuring that the impact of this tax is factored into overall trading costs and profitability.
Hope this article gave you a deeper insight about Securities transaction tax. Thanks for reading.
