All You Need to Know About Securities Transaction Tax In India
Securities transaction tax or STT is a tax in India that is paid on the value of all securities (other than commodities and currency) transacted through a recognised stock exchange.
The STT was first introduced in 2004 to avoid evasion of tax pertaining to capital gains and to bring in stock traders under one roof. Prior to the introduction of STT, traders used to maintain the secrecy of the profits they made in the equity market and evaded tax on capital gains. But now, the broker himself collects the tax together with transaction charges like stamp duty, etc. and hands it over to the government.
In India, equity futures, options and the associated shares are taxed and the taxation rates vary from each other. Taxes on futures are levied based on the delivery price and in case of options, both premium and the strike price are considered for tax payment. Off market share transactions do not come under STT.
Policies on taxing the financial sector came about in 1936. But it was not till 1978 when the world saw a formal tax structure applied on foreign transactions. Since then it has been increasingly adopted by many nations across the globe.
STT comes with its own set of characteristics. It is the single largest fee paid by any trader with discount stock brokers. It is proven that STT increases the cost of trading and has an effect on investor behaviour. Additionally it makes algorithmic trading and arbitrage riskier. It is equally true that the dominance of futures market has come down after the increase in securities transaction tax in the recent past.
Securities Transaction Tax varies across different types of instruments and undergoes revision from time to time. Currently equity shares (delivery based) carry a 0.125% STT on total purchase value. For equity oriented mutual funds, the applicable security transaction tax is 0.25% of the redemption value. There is no STT on purchase of equity shares, equity mutual funds, or intraday traded shares. Sale of options and futures attract an STT of 0.017% of the sale value.
When is STT applicable?
STT is applicable on securities that are traded at the stock market like shares, bonds and debentures. Derivatives being traded on stock markets, units issued by investment schemes and equity natured government securities also attract STT. Even other instruments like mutual funds based on equity trading and rights and interests in securities have STT levied on them.
Depending on the kind of security and whether the transaction is a sale or a purchase, different rates of STT are applicable. So a sale of options in securities is taxable at a rate of 0.017% and has to be borne by the seller. For sale of options (where the option has been exercised) the buyer will have to pay 0.125% STT. For sale of futures in securities, the seller will need to bear 0.01% STT.
An STT is levied on all equities listed on a recognised market. It is levied as and when a share transaction is done, making it transparent and fast. This also reduces the chances of wrong or no payment. If you are dealing in securities, derivatives, or futures options, then you definitely ought to select an experienced tax advisory expert. They help in providing the right guidance on sale/ purchase of the securities. With the right direction, you can be sure of complying with all the STT requirements and optimising your tax liability.