Securities Transaction Tax (STT) in India -STT Rate and Exemptions| Motilal Oswal

Securities Transaction Tax (STT) in India - Explained




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When you are an investor, and even if you are not, any income that you earn in India, is taxed. Gaining knowledge about taxes gives you an idea on how they may impact your budget and your financial portfolio. It also helps you to plan your finances better, so you can avoid the delay of payment of taxes (which is mandatory) and prevent unnecessary penalties. Taxes, on whatever incomes are applied, are collected by the Income Tax Department, under the purview of the Government of India. The STT (Securities Transaction Tax) is of particular importance to those individuals who own securities and other assets. 

What is STT?

The STT full form is the Securities Transaction Tax (STT), and it is a type of financial transaction tax payable in India on every purchase or sale of securities that are listed on the Indian stock exchanges. The two main stock exchanges are the National Stock Exchange, or the NSE, and the BSE, or the Bombay Stock Exchange. This would include shares, derivatives or equity-oriented mutual funds investment units (excluding commodities and currency). The tax is not applicable on off-market transactions or on commodity or currency transactions. The rates of STT are prescribed by the Central / Union Government through its Budget from time to time. In tax parlance, this is categorised as a direct tax. Collection of this tax is a statutory requirement which a broker needs to follow. This means that the liability of applying the tax is on the broker, when the client undertakes transactions in the stock market. The collected amount is then paid to the government. The charges and rate of STT are reflected on the contract notes which a broker provides to its clients for every execution of trades. The rate of tax varies with different types of transactions and securities. They are worth finding out about before you select a broker for any transactions in the markets. Brokers may have some additional fees for transactions carried out, and these must not be mistaken for the taxes that must be levied on any client.

The securities transaction tax (STT) was introduced in India a few years ago, to stop tax avoidance of capital gains tax. In the year of 2013, the Government of India was forced to curb the rate of taxation for the Securities Transaction Tax due to a large amount of protests by investors and brokers. The trading community, in general, wished this tax to be lowered as high taxes mean profits are compromised for investors. 

The SST Charge and Its Features

SST is a direct tax of the simplest form. It is not complex in its applicability or levy. The features of this easy, but important tax are given below in brief: 

  • The charge of SST is levied on every sell transaction in the case of futures and options contracts. 
  • All the sell transactions pertaining to any futures and options contracts will have an SST tax levied upon them. For the purpose of calculation of this tax, every future contract gets valued at the true traded price. In the case of options contracts, the trade is valued at a premium. 
  • In terms of the amount of SST that is payable by a clearing member, the total of all SST taxes of trading persons under them must be paid. 

STT (Securities Transaction Tax) Rate currently prevailing

As per the Finance Act 2004, and modified by Finance Act 2008 (18 of 2008) STT on the transactions executed on the Exchange shall be as under:

Sr No.Taxable securities transactionRates**Payable by1Sale of an option in securities0.05 %Seller2Sale of an option in securities, where option is exercised0.125 %Purchaser3Sale of a futures in securities0.01 %Seller4Delivery-based equity shares (Purchase)0.1 % Purchaser5Delivery-based equity shares (Sale)0.1 %Seller6 Equity oriented mutual funds 0.001 %Redemption of units 7Equity shares, equity mutual fund units 0.025 % Seller8STT on intra-day transaction 0.025 %Seller

** The rates mentioned herein keeps on changing as per government’s directives.

STT Applicability

Now that you know the answer to the question, “What is STT?”, you may require some clarity on which securities the tax is applicable. As far as the domestic stock exchanges of India go, STT is levied on any transactions that apply. Based on the Securities Contract Act of 1956, the following security transactions are covered:

  • Bonds, shares, debentures, and any other marketable security traded at the stock market. 
  • Any derivatives which are traded in the markets.
  • Any units which are issued to customers by a scheme of collective investment.
  • Any interests or rights in securities. 
  • Mutual funds based on trading in equities. 
  • Any government securities that have the nature of equity. 

STT Exemption under Income Tax:

As per Sec 36 of Income Tax Act 1961, STT can be claimed under income tax if the STT amount which you have paid is allowed as business expenditure provided you are showing share income under the head "Profits/Gains from Business and Profession" i.e. if trading of stocks is being made as a professional choice and is being carried out from business point of view. 

However if an assessee 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, then Gains or 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. And such people cannot claim STT under Income Tax.

At the end of the year, we provide a certificate of the STT that you have paid through the year. You can get a tax credit, as per conditions mentioned above. STT is a quick, effective and transparent tax. This is a unique tax that gets levied as soon as a transaction transpires. There is, hence, no hassle of non-compliance or non-payment, or of any incorrect payment. 

 

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