Securities Transaction Tax: What is STT?

Most people know about the sales tax that has to be paid when you buy something online, but not as many are aware of the securities transaction tax (STT). With the advent of online trading, the transactions involved in buying and selling securities have grown considerably. So needs to understand exactly what STT tax means and how it affects you. This blog will help you know STT meaning, how this tax works, what are STT charges, and whether it might affect your day-to-day financial activities.

What Is STT?

Stock Transaction Tax (STT) is a tax levied by the Government Of India for buying and selling stocks that are listed on the stock exchange. Even though STT Act does not define "securities," it provides the meaning of words that are not specified in the STT Act but instead specified in Securities Contracts (Regulation) Act, 1956 of Income Tax Act, 1961 to be deduced from those terms. Securities Contracts (Regulation) Act provides the following definitions of "Securities":

Shares, debentures, and bonds issued by the Central Government or a State Government; Investment certificates or certificates of deposit issued by a scheduled bank; Units of Unit Trust of India; and any other security notified by the central government in consultation with the Reserve Bank of India as security.

STT tax affects all parties involved in securities transactions. In layman's terms, that means anyone who participates in stock or bond trading will pay a tax on their trade. It means the tax is paid by the buyer of these securities and not by the seller. This means that it falls on the end investor trading in securities.
India has an STT rate of 0.025% for shares and government debt bonds and 0.001% for corporate bonds and equities.

Why was Securities Transaction Tax Introduced?

The STT was introduced in 2004 when Mr P. Chidambaram, the then finance minister, presented the Budget for 2004-05. The government introduced this tax to avoid capital gains income and bring more transparency to the market.

Many people who were trading in the market were not paying capital gains tax. The income from stock market trading was not reported as income, and people avoided paying taxes by stating that money was business profits and losses. With the introduction of STT, the government managed to bring more transparency through STT charges and started taxing business profits from stock market trading.

Features of STT

• Since you are now aware of STT's full form, STT meaning, and charges, it's time to look at its features; 

• The transaction tax contains no exemptions, no exclusions, and no loopholes. All financial instruments are taxed at their point of execution or settlement, including stock trades, bonds, options, futures and other derivatives, swaps, foreign exchange transactions, and all other instruments.

• When a transaction happens, the STT tax is collected by the market participants - the brokers, dealers, and clearinghouses.

• The tax is collected proportionally to the transaction size - an investor who buys $10 million worth of shares will pay ten times as much as an investor who buys a $1 million value of shares.

• The tax is levied on a"' per-transaction basis'" and not on a "'per share basis'" or any other basis that would result in double-taxation or discourage efficient trading practices such as hedging.

• The tax is not imposed on individuals. It is charged on all transactions in securities by institutional investors (defined to include hedge funds, mutual funds, pension funds, and all other institutional investors)

How To Calculate STT?

Consider the following scenario: a trader purchases 600 shares valued at Rs. Thirty thousand at Rs.50 per share and sells them for Rs.60 per share. If the investor sells the shares the same day you purchased them, the intraday STT rate of 0.025 percent will be applied. As a result, STT = 0.025*50*600 = Rs. 660 for the whole.
Furthermore, the STT applicable to futures and options contracts is 0.01 percent. If a trader purchases five lots of Index futures for Rs.6000 and sells them at Rs.6050, and the number of the Nifty is 60, then the STT is computed as follows: STT = 0.01*6050*560*5 = Rs.169.40.

STT and Personal Income Tax

The rationale for the trade heavily influences the taxation of money produced through share market trading. A person may exchange shares for business or as an investment, and the STT imposed by the authorities differs in both circumstances. You may distinguish the following two heads based on this aspect.

Capital Gains Income

A salaried or self-employed individual who trades in stock transactions exclusively for investment reasons and dealing in assets is not what he does. His primary line of work is eligible for income from capital gains. Gains or losses in such circumstances might be classified as either short-term or long-term capital gains, depending on how long the equities are kept. If the holding period is less than a year, the gains are short capital appreciation. In contrast, long-term capital gains apply to shareholdings with a holding period of more than a year.

Revenue from Share Trading as a Vocation

This situation develops when the income from stock trading is made as a professional commitment and is carried out from a business standpoint. In such circumstances, both losses and earnings from stock trading are reported as company income. This is then taxable at the government's standard income tax rates. You may deduct securities transaction tax paid on taxable income under section 36 of the Income Tax Act.

Securities Transaction Tax Rate in India (2022 data)

•    Equity share sale price - 0.1%
•    Equity share purchase price -0.1%
•    Selling unit of oriented mutual fund-0.001%
•    Other than via actual delivery or transfer, sale of equity shares or units of equity-oriented mutual funds- 0.025%
•    Futures sale in securities- 0.01%
•    Derivative- sale of option- 0.017%

Conclusion:

If you buy something, you can't claim the Security Transaction Tax (STT) as part of your acquisition costs, and it won't cut down on your capital gains tax payment. People who own equity pay LTCG (long-term capital gains tax) of 10% if the value is more than Rs. 1 lakh. People who own short-term capital gains pay STCG of 15%. As a business expense, it can be claimed by people who trade in index funds, stocks, or F&O.