How is STT levied?

Features of Securities Transaction Tax

The primary features of STT are:

• Applicability

This applies to the buying and selling of equity shares listed on recognized stock exchanges, and it also includes futures and options transactions in the equity segment. STT is levied on the sale of units of equity-oriented mutual funds when traded on the stock exchange.

• Varied Rates

Rates of STT will vary based on the type of security and the nature of the transaction. 

• Automatic Collection

STT is collected automatically by stock exchanges from brokers, who then collect it from traders. This ensures efficient and timely collection of the tax.

• Revenue Generation

It is a source of revenue for the government, contributing to the exchequer without placing a significant burden on investors, as it is a small percentage of the transaction value.

• Transparency

The transparent and straightforward nature of STT simplifies compliance for traders and investors. It also reduces the potential for tax evasion compared to other forms of transaction taxes.

• Legality

STT is governed by the Securities Transaction Tax Act, 2004. The act provides detailed guidelines on the imposition, collection, and administration of the tax.

Securities Liable for STT

Here are some securities liable for STT:

• Shares, bonds, stocks, scrips, debentures, or other marketable securities of an incorporated company or a body corporate 
• Units or instruments in any other form issued by any collective investment scheme for its investors
• Derivatives, for example, options and futures 
• Equity-oriented mutual funds units
• Any securitised debt instruments
• Rights or interest in securities

In the case of futures and options, STT will be levied only on the sale side. Note that all market transactions do not come under the purview of STT. 

Understanding How is STT Levied

STT is levied on selling or purchasing securities on listed stock exchanges. The government of India decides the rate of STT from time to time.

Listed stock exchanges or recognised entities in case of mutual funds or merchant bankers in case of IPO are required to collect STT from investors and deposit the same with the government before the 7th of every month. 

Here are the different rates on transactions:

Note: As per the Union Budget 2024-

- it is proposed to increase the rates of STT on the sale of an option in securities from 0.0625% to 0.1% of the option premium

- on sale of futures in securities from 0.0125% to 0.02% of the price at which such futures are traded.

When is Securities Transaction Tax Levied

Securities Transaction Tax (STT) is levied at specific instances when transactions involving certain types of securities occur on recognized stock exchanges.

Some circumstances where STT is imposed:

• STT is levied on both the buying and selling of equity shares when the transaction results in the actual delivery of shares. This means that when an investor buys shares and takes delivery or sells shares and delivers them, STT is applicable.
• STT is levied only on the selling side in intraday transactions where the shares are bought and sold on the same trading day without any actual delivery.
• STT is applicable on the selling side of futures contracts.
• STT is levied on the selling side of options contracts when the option is exercised.
• STT is levied on the sale of units of equity-oriented mutual funds when the transaction is conducted on a recognized stock exchange.

STT on Physical Delivery of Derivatives

All F&O contracts are physically settled. In this case, STT is levied on traders and is charged on the successful delivery of derivatives.

CBDT, the governing body, announced that all physical delivery of derivatives would be subject to 0.1% STT. These transactions are treated similar to equity share transactions and are taxed at the same rate.

STT and Its Connection with Income Tax

All transactions of securities listed on stock exchanges are charged with STT. However, the treatment of STT income tax purposes depends on the nature of the transaction.

All transactions on stock exchanges are based on two motivations— for trading/investing and to earn business income.

• Income from Investment/Trading

All salaried or self-employed individuals carrying out the transaction of securities for financial gains are liable to pay STT. All gains from such transactions are called capital gains and are classified as LTCG or STCG, depending on the holding period. 

• Business Income

Entities entering into securities transactions to generate business income are also liable to pay STT. However, one can claim the total STT paid as a deduction under Section 36 of the IT Act while filing returns. STT, in this case, is considered a business expense and is liable for deduction.

Takeaway

Understanding how Securities Transaction Tax (STT) is levied is essential for anyone participating in the financial markets. STT is a straightforward tax applied to specific transactions involving equity shares, derivatives, and equity-oriented mutual funds traded on recognized stock exchanges.

By being aware of the applicable rates and the nature of transactions subject to STT, you can accurately calculate transaction costs and also comply with the regulations.