Securities Transaction Tax (STT) is a form of financial transaction tax resembling Tax Collected at Source (TCS) that is levied on every purchase and sale of securities listed on the recognized stock exchanges in India. Regulated by the Securities Transaction Tax Act, STT encompasses various taxable securities transactions, including equity, derivatives, and units of equity-oriented mutual funds. It is required to be paid above the transaction value, leading to an increase in the transaction value.
Features of Securities Transaction Tax
STT is a straightforward direct tax, simple to compute and enforce. Key characteristics include:
- Applicable on all sell transactions for options and futures.
- Valuation of future trade at the actual traded price and each option trade at the premium.
- Aggregation of all STT taxes owed by trading members under a clearing member.
Applicability of STT on Securities
The taxable securities transactions, rates of STT, persons responsible for payment, and the value requiring STT payment are defined based on the nature of the security transaction. Notably, off-market transactions are excluded from the purview of STT.
Securities Transaction Tax and Income Tax
STT interacts with income tax through its impact on capital gains and business income. For transactions until 31 March 2018, any capital gains on sale of shares or equity-oriented mutual fund units subject to STT were taxed at beneficial/nil rates. Long-term capital gains were exempt from tax, while short-term gains were taxed at a concessional rate.
Levy of Securities Transaction Tax in India
STT is levied on each purchase and sale of shares listed on a domestic and recognized stock market, with the taxation rate determined by the government. The STT act covers all stock market transactions involving equities or equity derivatives, resulting in a quick, transparent, and effective imposition of the tax.
It’s important to understand the nuances of Securities Transaction Tax as it directly impacts the trading and investment landscape in India. The precise understanding of its application, rates, and implications ensures compliance and informed decision-making for investors and traders alike.
Securities on which STT is Applicable
While the term ‘securities’ is not defined under STT Act, STT Act specifically allows borrowing of definition of such terms not defined in STT Act but defined in Securities Contracts (Regulation) Act, 1956 or Income-tax Act, 1961. The term ‘Securities’ is defined in Securities Contracts (Regulation) Act and includes the following:
- Shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in or of any incorporated company or other body corporate.
- Derivatives.
- Units or any other instrument issued by any collective investment scheme to the investors in such schemes.
- Government securities of equity nature.
- Equity oriented units of mutual fund.
- Rights or interest in securities.
- Securitized debt instruments.
Hence, securities include all of the above the purpose of STT levy that are traded on recognized stock exchange. Off-market transactions are out of the purview of STT.
Levy of Securities Transaction Tax in India
| Taxable securities transaction | Rate of STT | Person responsible to pay STT | Value on which STT is required to be paid |
| Delivery based purchase of equity share | 0.1% | Purchaser | Price at which equity share is purchased* |
| Delivery based sale of an equity share | 0.1% | Seller | Price at which equity share is sold* |
| Delivery based sale of a unit of oriented mutual fund | 0.001% | Seller | Price at which unit is sold* |
| Sale of equity share or unit of equity oriented mutual fund in recognised stock exchange otherwise than by actual delivery or transfer and intra day traded shares | 0.025% | Seller | Price at which equity share or unit is sold* |
| Derivative – Sale of an option in securities | 0.017% | Seller | Option premium |
| Derivative – Sale of an option in securities where option is exercised | 0.125% | Purchaser | Settlement price |
| Derivative – Sale of futures in securities | 0.01% | Seller | Price at which such futures is traded |
| Sale of unit of an equity oriented fund to the Mutual Fund – Exchange traded funds (ETFs) | 0.001% | Seller | Price at which unit is sold* |
| Sale of unlisted shares under an offer for sale to public included in IPO and where such shares are subsequently listed in stock exchanges | 0.2% | Seller | Price at which such shares are sold* |
| PURCHASE OF UNITS OF EQUITY ORIENTED MUTUAL FUNDS | NIL | PURCHASER | NA |
* Please refer Rule 3 of Securities Transaction Tax Rules, 2004 for the manner of determining value of taxable equity or Equity oriented mutual fund transactions.
STT on a physical delivery of Derivatives – CBDT clarification dated 27 August 2018
Derivative contracts are generally settled in cash which means, stocks are not physically delivered and only the profits are paid and received by the contracting parties. These transactions, as given in the table above, are subject to an STT levy of 0.001 percent. However, SEBI had in its Circular dated 11.4.2018 listed around 46 stocks, in respect of which derivative contracts would be settled by way of physical delivery of shares as against cash. However, no clarity emerged on the rate of STT that would apply to these kinds of transactions.
Further, for such transactions, the stock exchanges began to levy an STT of 0.1 percent (this is the rate of STT for delivery based equity share transaction), which is almost 10 times of what is levied for derivative contracts settled in cash. Hence, a petition was lodged by the Association of National Exchange Members of India (ANMI) against the stock exchanges before the Bombay High Court to address the aforementioned concern of levy of 0.1 percent of STT on physical delivery of derivatives.
The High Court has sought the comments of the Central Board of Direct Taxes (CBDT) in this regard. The CBDT, in response, has issued a clarification dated 27 August 2018, where it has observed that where a derivative contract is being settled by physical delivery of shares, such transaction would be similar to a transaction in equity shares where the contract is settled by actual delivery of shares. Therefore, the STT rate as applicable to delivery based equity transactions would apply to such derivative transactions too.
Securities Transaction Tax and Income Tax
When STT levy was introduced in 2004, simultaneously new Section 10(38) was introduced to benefit taxpayers who would incur STT. As per income tax aw, for transactions undertaken until 31 March 2018, any capital gain on sale of shares or equity oriented mutual fund units (EOMF) which are subject to STT is taxed at beneficial/Nil rate.
While long term capital gain (if shares or EOMF are held for > 12 months) are exempt from tax, short term capital gain on such securities are taxed at concessional rate of 15%. However, in order to prevent abuse of exemption provisions by certain persons for declaring their unaccounted income as exempt long-term capital gains by entering into sham transactions, Finance budget 2018 proposed to withdraw the exemption on long term capital gain and tax long term capital gains on equity shares and EOMF at concessional rate of 10% with respect to transfer effected on or after 1 April 2018.
However, gains accrued till 31 January 2018 are grandfathered i.e., in case of transfers upto 31 January 2018, cost of acquisition of shares or EOMF acquired before 1 February 2018 will be replaced by fair market value as on 31st January 2018.
In case of person who is trading in securities and offering income/loss from such trading as business income, STT paid is allowed to be deducted as business expense.
When is Securities Transaction Tax Levied?
Each purchase and sale of shares listed on a domestic and recognised stock market is subject to a securities transaction tax. The government determines the taxation rate. Under the STT act, all stock market transactions involving equities or equity derivatives such as futures and options are subject to taxation. When a share transaction is completed, STT is levied. As a result, STT is quick, transparent, and effective. Because the tax is imposed as soon as the transaction occurs, incidents of non-payment, incorrect payment, and so on are minimised to a bare minimum. However, the net effect is that it raises the cost of the transactions.