Everything You Must Know About Securities Transaction Tax (STT)

What is the STT (Securities Transaction Tax) all about?

Securities Transaction Tax (STT) is a type of direct tax that is payable on the total value of securities and stock exchanges in India. STT is a tax levied on the purchase and sale of securities, such as equities, futures, options, etc, by the stock exchanges. These taxes do not include the transactions that are made on a non recognized stock exchange. Also, commodity and currency transactions are barred from STT. STT is automatically deducted during the buying and selling of securities.

Securities Transaction Tax came up in the year 2004, introduced by the Finance Minister, P. Chidambaram. When people started evading capital gains tax by not declaring their profits on the sale of stocks, the Finance Act, introduced a tax called the Securities Transaction Tax (STT). This was introduced to prevent tax evasion.

The rates of STT are different based on whether the equity shares have been bought or purchased. It is paid by the investor and is applicable to the transaction value at the time of trading.

Generally, the STT is calculated by a recognized stock exchange or by the prescribed person in the case of Mutual Funds. These are payable to the Government on or before the 7th day of the following month. In case the prescribed person fails to collect the taxes, the taxpayers should still pay the taxes equivalent to the calculated taxes within the 7th day of the following month. Failure to do so may result in the levying of heavy interests and even penalties.

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What are the Scopes in 'Securities' that become liable for the STT?

The term ‘Securities’ as per the definition in the Securities Contract (Regulation) Act includes those assets that are liable for Securities Transaction Tax. These constitute the following:

• Bonds, stock shares, scraps, debenture stock, or any other securities that can be marketed or are of a similar nature to this.
• Any Derivatives or units that have been obtained by the collective investment schemes.
• Any securities under the Government that are of an equity nature.
• Units of the mutual funds that are equity-oriented.
• Securities that contain personal rights or interests.
• The debt instruments that are under security

So, we see that 'securities' is a wide term when it comes to Securities Transaction Tax (STT). The STT includes all of the above securities that are recognized by the stock exchange when it comes to levying taxes.

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How is the Securities Transaction Tax levied?

The Securities Transaction Taxes are levied at a specific interest for each section according to the Security Contract Act by certain people, a buyer or a seller, on a particular value. These taxes are not random but actually calculated carefully.

STT for various types of orders are:

Since the STT is charged on both the buy and sell side for delivery trades, the average price is to be calculated. The formula to calculate the average price is:

Average price = (Buy Qty*Buy Price) + (Sell Qty*Sell Price) / (Buy Qty+Sell Qty)
Average price = (Total cost to buy shares) + (Total revenue from selling shares) / (Total number of shares bought and sold)

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How is STT calculated?

You must 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:

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

Example scenarios

Equity intraday

• Buy: 500 shares at ₹100 each.
• Sell: 500 shares at ₹105 each.
• Average price = (500 * ₹100) + (500 * ₹105) / 1000 = ₹102.5
• STT (on sell side) = 500 (shares sold) * 102.5 (average price) * 0.025% = ₹13 (₹12.81 rounded off to the nearest rupee)

Equity delivery

• 1st October 2024 Buy: 500 shares at ₹100 each.
• 3rd October 2024 Sell: 500 shares at ₹105 each.
• STT Buy = 500 (shares bought) * 100 * 0.1% = ₹50
• STT Sell: 500 (shares sold) * 105 * 0.1% = ₹53( ₹52.50 rounded off to the nearest rupee)

Options

• STT on the intrinsic value of an exercised option contract
  • 1 lot of CE = 50 units
  • Strike price = ₹17,300
  • Spot price = ₹17,350
  • Intrinsic Value for 1 lot = (₹17,350 - ₹17,300) * 50 units = ₹2,500
  • STT on intrinsic value = 0.125% * ₹2,500 = ₹3 (₹3.125 rounded off to the nearest rupee)
• STT on premium
  • 1 lot = 50 units
  • Strike price = ₹17,300
  • Premium received = ₹60 for one lot
  • Total Premium received = ₹60 * 50 units = ₹3,000
  • STT on premium = 0.1% * ₹3,000 = ₹3

Futures

• Sell: 1 Lot of XYZ futures contracts.
• Price of 1 lot = ₹7,50,000
• STT (on sell side) = 0.02% * ₹7,50,000 = ₹150

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How are the Securities Transaction Taxes Counted on Physical Delivery of Derivatives?

On the 27th day of August in 2018, the CBDT clarified regarding certain rules for the Physical Delivery of Derivatives. This derivative contract is generally paid in cash for those stocks which have not been physically delivered.

• STT (Securities Transaction Tax) applies to physical settlements of derivative contracts. It's important to understand that most derivative contracts are settled in cash, meaning there's no exchange of actual stocks, only the difference in value. In these cases, STT is minimal (0.001%).
• Rate of STT on Physical Delivery:
  Here's the key point: The STT rate for physical delivery of derivatives is 0.1%, which is significantly higher than the rate for cash-settled contracts. This higher rate is the same as the STT for regular delivery-based equity transactions.
• Dispute and Clarification:
  Initially, there was some ambiguity regarding the STT rate for the physical delivery of derivatives. The stock exchanges started levying 0.1% STT, but the Association of National Exchange Members of India (ANMI) challenged this in court.
  Finally, the Central Board of Direct Taxes (CBDT) clarified that physical delivery of derivatives would indeed be subject to 0.1% STT. This brought certainty to the process.

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Securities Transaction Tax and Income Tax

Tax on Capital Gains
From transactions until 31 March 2018, long-term capital gains (LTCG) on shares and equity-oriented mutual funds (EOMF) with STT were exempt, while short-term gains (STCG) were taxed at 15%.

Effective 23rd July 2024, STCG is taxed at 20%, and LTCG (for holding over 12 months) at 12.5%, as amended in Budget 2024. Gains accrued before 31 January 2018 are grandfathered, using the 31 January 2018 market value as the cost of acquisition.

Tax on Business Income
For securities trading income treated as business income, STT paid is deductible as a business expense.

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What is the tax rate on shares on which STT is levied?

1. Short-Term Gains (Holding Period < 1 Year):
   • Tax @ 15% till 22nd July 2024.
   • Tax @ 20% from 23rd July 2024 onwards.
2. Long-Term Gains (Holding Period > 1 Year):
   • Tax @ 10% till 22nd July 2024.
   • Tax @ 12.5% from 23rd July 2024 onwards.

Note: These concessional rates apply only when STT is paid on both purchase and sale of the securities.

If you are an investor in the financial market, you must understand the STT. By being aware of the STT rates and the nature of the transactions subject to STT, investors can calculate transaction costs and comply with the regulations. If you need more information on STT or want to know how much to pay, consult our tax experts.

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