What Are STT Charges? How Is It Calculated?
STT Charges: An Overview
As there are many charges that are applied to investors while trading security such as brokerage charges, turnover fees, service tax, stamp duty, etc. Security Transaction Tax is one of them which is a direct tax levied on traders of securities like TDS.
What is STT in the Share Market?
Securities transaction tax (STT) is a tax levied on securities that are traded on a stock exchange and are payable by investors to the central government. It is a direct tax that is applied on the purchase and sale of securities on a registered stock exchange. This tax is charged on equity, derivatives, units of equity-oriented mutual funds including Equity Linked Saving Scheme (ELSS), and unlisted shares sold under an offer for sale to the public included in an initial public offering (IPO).
This tax was introduced in India in the 2004 Union Budget and is governed by Security Transaction Tax Act (or STT Act) to prevent tax evasion by investors. This Act came into effect on 1 October 2004. Before this Act, investors used to avoid paying taxes on their investment income by showing losses. As this tax is directly applied at the source, no one can evade the tax.
The collection of STT works in a similar way as TCS or TDS. It has to be collected by a recognized stock exchange or by the prescribed person in the case of a Mutual Fund or the lead merchant banker in the case of an IPO. It has to be paid to the government on or before the 7th of the following month. Failure to pay STT will attract interest and penal consequences.
Features of Securities Transaction Tax
The salient features of STT are –
- It is applied only to equity and equity-related securities.
- It is not applied to debt securities.
- It is applied to the sale of equity mutual funds but not to the purchase of equity mutual funds.
- As it is applied directly, it will increase the cost of the transaction.
- The rates applied are different on different securities and also depend on whether it is a sale or purchase transaction.
- Individual investors will not pay this tax but rather a clearing member will pay all the tax of the investor associated with them.
- The Central Government will decide the tax rates applicable under the STT Act.
Securities Transaction Tax: Applicability
An STT charge is a charge or rate that is applied to different securities with the purchase and sale of each security. The rates are decided by the government and can be subject to change from time to time if needed. This table will provide the detailed STT charges applied to different securities.
|S.No.||Securities||Transaction Type||Tax Rate||Payable By||Applies on|
|1.||Actual delivery or transfer of an equity share||Purchase||0.1%||Purchaser||value of taxable securities transaction based on the volume-weighted average price.|
|2.||Actual delivery or transfer of an equity share||Sale||0.1%||Seller||value of taxable securities transaction based on the volume-weighted average price.|
|3.||Actual delivery or transfer of an equity-oriented fund (Mutual fund)||Purchase||NIL||NA||NA|
|4.||Actual delivery or transfer of an equity-oriented fund (Mutual fund)||Sale||0.001%||Seller||value of taxable securities transaction based on the volume-weighted average price.|
|5.||Other than the actual delivery or transfer of an equity share||Sale||0.025%||Seller||value of taxable securities transaction based on the volume-weighted average price.|
|7.||When options are exercised||Sale||0.125%||Purchaser||settlement price|
|8.||Futures||Sale||0.010%||Seller||price at which such futures are traded.|
How to Calculate Securities Transaction Tax?
Intraday Trading – When the securities are bought and sold on the same day, it is called intraday trading. It is charged only on the sell side of the transaction at the rate of 0.025%.
Example: A trader buys 100 shares of Reliance Industries Limited on 15th November 2022 for ₹ 2,000 each at 10:00 AM and sells them off at ₹2,200 at 3:30 PM on the same day. Here, STT will be ₹55 calculated as (₹ 2,200 x 100 x 0.025% = ₹ 55.00)
Delivery Trades – In this scenario, STT is charged on both sides when a trader buys or sells a particular equity share at the rate of 0.1%.
Example: A trader buys 100 shares of Reliance Industries Limited on 15th November 2022 for ₹ 2,000 each and sells them off at ₹ 2,200 on 18th November 2022. Here, STT will be applied on both the buy and sell sides at the rate of 0.1%. On the buy side, STT will be ₹200 calculated as (₹ 2,000 x 100 x 0.1% = ₹ 200.00), and on the sell side, STT will be ₹ 220 calculated as (₹ 2,200 x 100 x 0.1% = ₹ 220.00). So, the total STT will be ₹ 440 calculated as (₹ 200 + ₹ 220).
Options – STT will be applied on the sell side of the transaction at the rate of 0.05% when the option is not exercised and at the rate of 0.125% when the option is exercised.
Example - A trader sells one lot of calls on the Sensex at a strike price of Rs 20,000 at the rate of ₹ 750 each. Hence, STT charges will be ₹ 18.75 calculated as (50 (Lot size of Sensex) x ₹ 750 x 0.05%).
Futures – In this case, STT will be applied on the sell side of the transaction whether it is intraday or positional trading. It is charged at the rate of 0.010%.
Example - A trader sells one lot of Sensex on 15th November 2022 at 20,000. His total volume comes to 20,000 x 50 = ₹ 10,00,000. On the same, he has to pay ₹ 100 as STT calculated as (₹ 10,00,000 x 0.010% = ₹ 100.00).
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As we all know tax evasion is illegal in India, security transaction tax helps in curbing evasion and will therefore help in increasing transparency in the system. Though it will increase the cost of transactions for the traders but at the same time simplify the process of capital gain reporting and tax collection.
Is security transaction tax compulsory?
Yes, STT is compulsory to be collected by a recognized stock exchange or by the prescribed person in the case of a Mutual Fund or the lead merchant banker in the case of an initial public offer. It has to be paid to the government on or before the 7th of the following month failure to attract interest or penal consequences on it.
What is the purpose of STT?
The main purpose of STT is to prevent the evasion of capital gains tax on profits earned by transacting in securities.
What is the security transaction tax in mutual funds?
In the case of mutual funds, STT is applicable only to equity-related mutual funds. There is no STT when it comes to debt-oriented mutual funds.
Can I deduct STT from capital gains?
No, STT is not subject to any deduction from capital gains. It will not reduce capital gains tax liability. The only exception is when you are trading shares professionally and can claim a deduction under income tax.