Securities Transaction Tax (STT)

Features of Securities Transaction Tax

STT is a simple direct tax and is not very complicated to calculate or levy. Some of the most distinguishing features of STT are as listed below.

1. STT charge is levied on all sell transactions for both options as well as futures
2. For purpose of STT calculation, each future trade is valued at the actual traded price while each option trade is valued at premium
3. The amount STT that a clearing member has to pay is the sum total of all the STT taxes of trading members under him

Securities Transaction Tax Rate in India

The table below depicts the rate at which various securities are taxed. The rate of taxation for STT is set by the government and depends upon the type of security and also on the fact that the transaction is sale or purchase. Apart from all the advantages that STT offers with respect to transparent and timely payment of tax on trading instruments, STT also ensures that inflow of speculative cash in reduced in any market.

This table can further be refined to include details about the type of securities and then list down the corresponding rates of taxation. This is explained in the table below.

Securities on Which STT is Applicable

Securities transaction tax is levied on various types of transactions made on the domestic stock exchanges in India. According to the Securities Contract Act, 1956, following are the transactions covered under the same.

1. Shares, bonds, debentures or any such marketable security which is traded at the stock market
2. Derivatives traded in the market
3. Units issued by any collective investment scheme to customers
4. Government securities that are of the nature of equity
5. Rights or interests in securities
6. Mutual funds that are based on equity trading

Securities Transaction Tax and Income Tax

Taxation on the money made via share market trading depend largely on the purpose for which share transactions are done. An individual can trade shares for business purposes or as an investment activity. In both the cases the STT that is levied by the government, varies. Depending upon this factor, following two heads can be differentiated.

1. Income from Capital Gains:Income from capital gains is applicable when the assesse is a salaried or self-employed person who deals in stock transactions only for investment purposes and trading in securities is not what he does as his main line of profession. Gains of losses in such cases can be grouped as short-term capital gains or long-term capital gains depending upon the period for which the stocks are held. If the holding period is less than a year, then the gains are classified as short-term capital gains whereas for share holdings with a holding period more than one year, the term long-term capital gains is applicable.
2. Income from Share Trading as a Profession:This case arises when the income from trading of stocks is being made as a professional choice and is being carried out from business point of view. In such cases the losses as well as gains from share trading is classified as business income. This is then taxed at the regular income tax rates set by the government. Securities transaction tax paid on income from taxes can then be claimed as deduction under section 36 of the income tax act.

When is Securities Transaction Tax levied?

Securities transaction tax is levied on each purchase and sale of equity listed on a domestic and recognized stock market. The rate of taxation is determined by the government. All stock market transactions that involve equity or equity derivatives like futures and options are liable to be taxed under the STT act. STT is charged as soon as a share transaction is completed. This makes STT fast, transparent and effective. Since the tax is levied as soon as the transaction arises, instances of non-payment, wrong payment etc. are reduced to minimum. The net result of this however, is that it pushes up the cost of the transactions.

Example of Securities Transaction Tax (STT)

Suppose a trader buys 500 shares worth Rs.10000 at Rs.20 each and sells it at Rs.30 each. If the trader sells the shares the same day then intraday STT rate will apply which is 0.025%.

So, STT = 0.025*30*500 = Rs.375

Similarly, for futures and options, STT applicable is 0.01%. Suppose a trader buys 5 lots of Nifty futures at Rs.5000 and sells it at Rs.5010, The lots size of nifty is 50 then STT is calculated as:

STT = 0.01*5010*50*5 = Rs.125.25