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What is Securities Transaction Tax?

Updated on September 30, 2022 , 13 views

Tax evasion is widespread among taxpayers who want to reduce their tax payments to the government. To restrict this activity, the government keep a close eye on such measures by enacting legislation, introducing new rules, or amending existing ones.

STT

When people began avoiding Capital gains Taxes by failing to declare Earnings on stock sales, the Finance Act of 2004 established the Securities Transaction Tax (STT) as a clean and effective method of collecting taxes from the transactions of the financial Market. In this article, you can find a brief description of the Security Transaction Tax and all the details regarding it, including the tax rates.

What is Security Transaction Tax in India?

STT refers to a type of financial transaction tax that works similarly to Tax Collected at Source (TCS). It is a direct tax imposed on all purchases and sales of securities traded on India's registered stock exchanges. The Securities Transaction Tax Act (STT Act) governs it, which also specifies the types of taxable securities transactions subject to STT. Derivatives, equities, and units of equity-oriented Mutual Funds are all taxable securities.

Unlisted shares sold within an offer for public sale included in an IPO and subsequently listed on stock exchanges are also included. STT is a fee that has to be paid in addition to the transaction value, hence increasing the same. It is imposed on taxable securities transactions. The STT Act also specifies the transaction value for which it must be paid and the individual who is liable for paying STT, which can be the buyer or the seller.

Features of STT

They have certain distinguishing characteristics because it was enacted to collect taxes from the financial market efficiently. Some of the key features are:

  • STT only applies to sell trades in options and futures
  • There is a criterion for paying this tax because it only applies to recognised stock exchanges, not individual members. The clearing member is responsible for paying the sum of all STT taxes owed by trading members under him
  • STT on futures is calculated based on the current market price. However, premium traded value is calculated in the case of options
  • The type of security determines the STT Tax Rate. It also relies on whether or not there are any sales or purchases
  • In addition, the rate of taxation for STT is determined by the Indian Central Government
  • Securities Transaction Taxes include several distinguishing characteristics

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Securities Transaction Tax is Direct or Indirect?

STT is a direct tax levied on acquiring and selling securities listed on India's recognised stock exchanges. The Average Price is always used to calculate STT. It is not calculated using the First In First Out (FIFO) or Last In First Out (LIFO) algorithms.

How to Reduce Security Transaction Tax?

There is no method to minimise your STT charges because it is applied to the transaction value, and the Government of India sets the rates. The only thing to remember is that you should close off your position before expiration if you're an options trader.

India's Security Transaction Tax Rate

The government determines the STT rate based on the type of security and whether the transaction is a sale or a purchase. STT ensures that inflows of speculative cash are limited in any market. It also benefits in terms of transparent and timely payment of tax on trading instruments. The tax rates for various securities are shown in the table below.

Taxable Securities Transaction Taxation Rate Payable By
Sale of a securities option 0.017% Seller
Sale of a securities option, where the option is exercised 0.125% Purchaser
Sale of a securities futures 0.01% Seller

This table can be further extended by adding information on the types of securities and listing the associated tax rates. The table below explains everything.

Taxable Securities Type Transaction Type Applicable STT
Equity shares based on delivery Purchase 0.125% on the entire value
Mutual funds that are equity-oriented Units' Redemption 0.25%
Equity mutual fund units, equity shares, and intra-day traded shares Purchase Nil
Options’ derivative- sale Sale 0.017%
Futures' derivative sale Sale 0.017%

Securities with STT Applicable

An STT is imposed on several sorts of transactions made on India's domestic stock exchanges. The following are the transactions covered by the Securities Contract Act of 1956.

  • Shares, Bonds, Debentures, and any other marketable security traded on a stock exchange
  • In the market, traded derivatives
  • Units received by the Customers from collective Investment plan
  • Government securities with the characteristics of equity
  • Securities rights or interests
  • Mutual funds based on stock trading are called Equity Mutual Funds

Income Tax and STT

Here are the details concerning how the income tax is associated with STT:

Gains on Capital are Taxed

When the STT was implemented in 2004, a new Section 10(38) was included to help taxpayers who were subjected to STT. According to the Income Tax Act, any Capital Gain on the sale of shares or Equity Oriented Mutual Fund units (EOMF) subject to STT was taxed at a beneficial or nil rate for transactions completed before March 31, 2018.

While long-term capital gains (if shares or EOMF are held for more than 12 months) were tax-free, short-term ones were taxed at 15%. However, to prevent certain individuals from abusing exemption provisions by declaring unaccounted income as exempt long-term capital gains, Finance Budget 2018 proposed to remove the long-term capital gain exemption.

It also proposed to tax long-term capital gains on equity shares and EOMF at a reduced rate of 10% for transfers made on or after April 1, 2018. In the case of transfers made before January 31 2018, the cost of acquiring shares or EOMF before February 1 2018, is replaced by the Fair Market Value as of January 31 2018.

Taxes on Corporate Profits

STT paid is authorised to be deducted as a business expense in the case of a person who trades in securities and offers gain or loss from such trading as business income.

Conclusion

Each acquisition and sale of equities listed on a domestic and recognised stock market is subject to a securities transaction tax. The government determines the rate of taxation. The STT applies to all stock market transactions involving equities or equity derivatives such as futures and options.

When a share transaction is completed, STT is levied. As a result, STT is quick, transparent, and effective. Non-payment, incorrect payment, and other instances of non-payment are minimised to a bare minimum because the tax is imposed as soon as the transaction occurs. However, this has the effect of increasing transaction costs.

Disclaimer:
All efforts have been made to ensure the information provided here is accurate. However, no guarantees are made regarding correctness of data. Please verify with scheme information document before making any investment.
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