Securities Transaction Tax (STT), a crucial levy in the Indian stock market, can sometimes create confusion for new investors. STT tax aims to curb tax evasion and streamline the securities tax regime, making it a vital part of the trading ecosystem. STT charges apply to both buyers and sellers, however, the details can differ depending on the type of transaction.
This article will explains the details of STT charges, what is STT charges, STT charges on equity, their application on different types of securities, and the benefits they bring to the financial market.
What is STT Charges?
STT is a direct tax imposed by the Indian government on the buying and selling of securities traded on recognized stock exchanges in India. It was introduced in 2004 to curb tax evasion and streamline the securities tax regime.
STT charges are borne by both the buyer and seller (in some cases, only the seller) depending on the type of transaction.They are calculated as a percentage of the transaction value, making them a transparent and straightforward tax.
Key Features of STT Charges
Securities Transaction Tax (STT) charges come with distinct characteristics that set them apart from other types of taxes levied in the Indian stock market. Here’s a breakdown of the key features of STT:
Transaction-based
Unlike capital gains tax which applies to profits earned, STT is a flat tax levied on the transaction value itself. This makes it a straightforward and predictable cost for investors to factor in.
Direct tax
STT is collected directly by the government at the time of the transaction. This eliminates the need for complex calculations and record-keeping for investors compared to capital gains tax which requires tracking purchase prices and sale proceeds.
Differentiated rates
STT charges are not uniform across all securities or transaction types. The rates vary depending on the type of security (equity, derivatives), transaction mode (delivery vs. intraday), and even the role of the investor (buyer vs. seller). This targeted approach ensures a balance between revenue generation and minimising the impact on specific investment strategies.
Market transparency
STT promotes transparency in the stock market by discouraging the under-reporting of transactions to avoid capital gains tax. This fosters a more reliable and efficient market environment.
Limited impact on long-term investors
The relatively low STT rate for delivery-based transactions (0.1% for both buyer and seller) has minimal impact on long-term investment strategies. When compared to potential long-term capital appreciation, the STT cost becomes negligible.
Potential impact on short-term trading
Frequent traders, particularly those employing day trading strategies,might find STT charges more significant. The seller’s STT on intraday equity trades (0.025%) can eat into profits,especially for low-margin trades.
Not a substitute for capital gains tax
It’s crucial to remember that STT does not eliminate the need to pay capital gains tax. If you sell equity shares within a year of purchase and make a profit, you will still be liable to pay short-term capital gains tax on the gains, irrespective of STT already deducted.
STT Charges on Equity
Equity shares, the most common type of security traded in India, have different STT charges on equity depending on the transaction type:
Delivery-based transactions
This applies when you buy or sell shares with the intention of taking ownership (delivery) of the underlying stocks. In this scenario, both the buyer and seller are liable to pay STT at a rate of 0.1% of the transaction value.
Intraday trading
If you buy and sell shares within the same trading day (intraday), only the seller incurs an STT charge. The rate for intraday equity trading is significantly lower at 0.025% of the selling price.
Example:
You purchase 100 shares of Company X at Rs. 100 per share for delivery. The total transaction value is Rs. 10,000 (100 shares * Rs. 100).
- Buyer’s STT: Rs.a 10 (0.1% * Rs. 10,000)
- Seller’s STT: Rs. 10 (0.1% * Rs. 10,000)
You buy 100 shares of Company Y at Rs. 200 per share and sell them on the same day at Rs. 210 per share.
- Buyer’s STT: Rs. 0 (No STT on intraday purchase)
- Seller’s STT: Rs. 5.25 (0.025% * Rs. 210 * 100)
Key Points to Remember:
- STT is a flat tax, meaning it is not progressive and applies uniformly irrespective of the investor’s income bracket.
- STT is rounded off to the nearest rupee.
- STT charges are deducted by the broker and deposited with the government on behalf of the investor.
STT Charges on Equity Derivatives
Derivatives like stock futures and options contracts also attract STT, but the rates differ from equity shares. Here’s a breakdown:
Equity futures
STT is levied only on the seller at a rate of 0.0125% of the contract value.
Equity options
STT is charged on the seller at a rate of 0.0625% of the premium paid for the option. However, if you exercise an option contract (buy or sell the underlying shares), an additional STT of 0.125% is levied on the intrinsic value (difference between the strike price and market price) of the option.
Example:
You sell a Nifty futures contract with a contract value of Rs. 1,000,000.
- Seller’s STT: Rs. 12.50 (0.0125% * Rs. 1,000,000)
You sell a call option for Company Z with a premium of Rs. 50 per share. You sell 50 contracts (representing 50 shares).
- Seller’s STT: Rs. 15.625 (0.0625% * Rs. 50 * 50)
Important Note: These are just a few examples. STT rates for other derivative products or specific situations may vary. It’s always recommended to consult your broker or refer to official government sources for the latest STT rates and applicability.
Benefits of STT Charges
While STT adds a cost to your trading activities, it serves several crucial purposes that benefit both the government and the overall financial market:
Curbs tax evasion
By levying a transaction tax directly on the purchase and sale of securities, the government discourages investors from concealing their securities transactions to avoid capital gains tax. This promotes transparency and fairness in the market.
Simplified tax regime
STT eliminates the need for complex calculations and record-keeping related to capital gains tax on each transaction. This simplifies tax filing for both investors and the government.
Boosts government revenue
The collected STT charges contribute to government revenue, which can be used for various public expenditures and infrastructure development projects.
Encourages long-term investing
The relatively low STT rate for delivery-based transactions (0.1% for both buyer and seller) compared to potential long-term capital appreciation incentivizes investors to hold stocks for a longer period. This promotes stability within the market.
Improves market liquidity
Increased investor participation due to a simplified tax regime and potential long-term benefits can contribute to improved market liquidity. This translates to easier buying and selling of securities.
Conclusion
Securities Transaction Tax (STT) is a direct tax levied on the purchase and sale of securities listed on Indian stock exchanges. STT is payable on different types of transactions at varying rates and collected by recognized entities. The STT Act outlines taxable securities and rates, which are subject to modifications by the government. If someone wants to know more about stt charges, what is stt charges and stt charges on equity, one should always consult a financial advisor.
By effectively managing your trading activities and leveraging tax-efficient investment options, you can minimise the impact of STT charges and achieve your financial goals. SMC Global Securities, a leading stockbroker in India, provides a wide range of investment products and services to meet various investor requirements.
FAQs on STT Charges
1. What is STT?
STT stands for Securities Transaction Tax. It’s a direct tax levied by the Indian government on the purchase and sale of securities traded on recognized stock exchanges.
2. How much is STT?
STT rates vary depending on the type of security and transaction. For delivery-based equity trades, both buyer and seller pay 0.1% of the transaction value. Intraday equity trades only incur a 0.025% STT charge for the seller.
3. Who pays STT?
The party responsible for paying STT depends on the transaction type. In delivery-based trades, both buyer and seller pay.For intraday trades, only the seller incurs the STT charges.
4. Does STT replace capital gains tax?
No, STT is not a substitute for capital gains tax. You might still be liable to pay short-term capital gains tax on profits from selling equity shares within a year, irrespective of STT already deducted.
5. How does STT impact different investment strategies?
STT has a minimal impact on long-term investors due to the low rate for delivery-based trades. However, frequent traders,especially those employing day trading strategies, might find STT charges more significant due to the impact on low-margin trades.
