There are different kinds of charges that an investor has to bear at the time of buying or selling securities from their Demat account. We often hear terms such as Goods and Services Tax (GST), brokerage charges, transaction tax, etc. However, the one that an average investor is less aware of is the Securities Transaction Tax (STT).
STT is a type of financial tax that is levied on buy &sell order of securities listed on the stock exchanges in India. The investors and traders are required to pay this tax to the central government and hence it is categorized as a regulatory charge.
Why was Securities Transaction Tax Introduced?
It was a common practice by certain investors to evade taxes on capital gains prior to the introduction of STT. They did it to save their tax outflow. To avoid such practices, it became necessary for the Government to keep a tab on such actions and for that, they introduced the STT in the Union Budget of 2004. With the imposition of this tax, an investor cannot avoid paying taxes as it is levied at the source.
Features of STT
STT has some distinguishing features. Let’s take a closer look at them.
- It is important to note that STT is levied exclusively on sell transactions of both Futures and Options.
- For STT calculation purposes, Futures are valued at the actual traded price whereas each Option trade is valued at a premium.
Examples of Securities Transaction Tax
For a better understanding of the taxation of STT, let’s consider an example.
Suppose there’s an investor, Mr. A in the Indian Equity market. He bought 500 shares at Rs. 20 each and sells at Rs.30 each. As per the intraday equity trading, the intraday STT which will be applicable is 0.025% on sell side.
So the STT calculation on this transaction will be:-
STT=0.025%*30*500=Rs.3.75
Likewise, STT for futures and options are 0.01% on Sell Side and 0.05% on sell side (premium) respectively.
When is Securities Transaction Tax levied?
Every time there’s a purchase and sale of securities listed on a domestic and recognized stock market, STT is levied. As per the STT Act, every stock exchange involving equity and equity derivative must pay STT. It is charged as soon as a transaction occurs in the share market.