What is Securities Transaction Tax (STT)?

Introduction

If you invest or trade in the Indian stock market, you may have noticed a small charge called STT in your contract note. Many investors see this deduction but are not fully sure what it means. Understanding taxes related to investments is an imperative because they directly affect your returns.

In this blog, we will delve deep into what is securities transaction tax (STT). Once you read the entire article, you will understand its meaning, rates, how it works, and how it impacts investors and traders in India. Whether you are a beginner or a regular market participant, this guide will help you clearly understand STT.

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What is Securities Transaction Tax (STT)?

Securities Transaction Tax, popularly known as STT, is a direct tax levied by the Indian government on the purchase or sale of securities listed on recognised stock exchanges in India.

In simple words, what is securities transaction tax (STT)? It is a tax that you pay when you buy or sell shares, derivatives, or certain other securities through the stock exchange. The tax is automatically deducted by your broker at the time of the transaction and passed on to the government.

STT applies only to transactions done on recognised stock exchanges such as NSE and BSE. It does not apply to off-market transactions.

Reason for Introducing STT in India

The Securities Transaction Tax was introduced by the Indian government in 2004. The main objective was to create a simple and transparent way to collect tax from stock market transactions.

Before STT, tracking profits from trading and investments was difficult, and tax evasion was common. STT made tax collection easier because it is collected at the time of the transaction itself.

Objectives of Securities Transaction Tax

The key objectives behind introducing STT include:

• Ensuring easy and efficient tax collection
• Reducing tax evasion in capital market transactions
• Bringing transparency to stock market trades
• Compensating for lower long-term capital gains tax (earlier exempt)

By charging a small tax on every transaction, the government ensures steady revenue with no heavy burden on investors.

Who Pays Securities Transaction Tax?

STT is paid by:

• Investors buying or selling equity shares
• Traders doing intraday trades
• Participants trading in futures and options
• Investors redeeming equity-oriented mutual funds

Although the broker collects STT, the actual burden falls on the buyer or seller depending on the type of transaction.

On Which Transactions is STT Applicable?

STT is applicable on the following securities traded on recognised stock exchanges:

• Equity shares
• Equity-oriented mutual funds
• Futures and options contracts
• Units of equity-oriented funds

Securities Transaction Tax is not applicable to:

• Bonds and debentures (generally)
• Government securities
• Commodities traded on commodity exchanges
• Currency derivatives

STT Rates in India

The rate of STT depends on the type of security and the nature of the transaction. The rates are small but vary across delivery, intraday, and derivatives trades.

Common STT Rates (Indicative)

• Equity delivery (buy and sell): Charged on both sides
• Equity intraday: Charged only on the sell side
• Futures: Charged on the sell side
• Options: Charged on premium value (sell side)
• Mutual fund redemption: Charged on redemption value

It is the government that decides these rates and they may change from time to time.

How is STT Calculated?

STT is calculated as a percentage of the transaction value.

For example: Assume that you are buying shares worth ₹1,00,000. If the STT rate is 0.1%, the STT charged will be ₹100.Your broker automatically calculates and deducts this amount and there is no need to pay it separately.

How STT Works in the Stock Market?

When you place a buy or sell order through your trading account, the exchange executes the trade. At the same time:

1. STT is calculated on the transaction value
2. The broker deducts STT from your account
3. The broker deposits the collected STT with the government

This entire process is seamless and happens in the background.

STT on Equity Delivery Trades

Equity delivery trades are those where shares are bought and held in a demat account.

• STT is charged on both buy and sell transactions
• The rate is relatively higher compared to intraday trades
• It increases the overall cost of long-term investing

That said, for long-term investors, the impact of STT is usually small compared to market gains.

STT on Intraday Trades

Intraday trading is all about buying and selling shares on the same day.

• STT is charged only on the sell side
• The rate is lower than delivery trades
• It affects frequent traders more due to high turnover

For active traders, STT can add up over time and reduce net profits.

STT on Futures and Options (F&O)

STT also applies to derivatives trading:

Futures

• Charged on the sell side
• Calculated on the traded value

Options

• Charged on the sell side
• Calculated on the option premium

Derivatives traders should factor STT into their trading costs, especially if they trade frequently.

STT on Mutual Funds

STT applies only to equity-oriented mutual funds.

• Charged at the time of redemption or sale
• Not charged at the time of purchase
• Debt mutual funds do not attract STT

This tax slightly reduces the redemption amount received by investors.

STT on Bonds and Government Securities

Generally, STT is not applicable to:

• Government bonds
• Treasury bills
• Most debt instruments

This makes debt investments slightly more tax-efficient in terms of transaction taxes.

Impact of STT on Investors

For long-term investors:

• STT is a small one-time cost
• It slightly reduces overall returns
• The impact is minimal for buy-and-hold strategies

Understanding what is securities transaction tax (STT) helps investors estimate their net investment returns in a better manner.

Impact of STT on Traders

For traders:

• STT increases transaction costs
• High-frequency trading turns out to be more expensive
• Profit margins may reduce

Active traders should always include STT while calculating breakeven points.

STT and Income Tax Treatment

STT has a special treatment under income tax laws:

• STT paid is not allowed as a deduction for capital gains
• However, it can be claimed as a business expense by traders who show trading income as business income

This distinction is important while filing income tax returns.

Advantages of Securities Transaction Tax

Some key benefits of STT are:

• Simple and transparent tax system
• Easy collection by the government
• Reduced chances of tax evasion
• Lower compliance burden on investors

STT has helped streamline taxation in capital markets.

Disadvantages of Securities Transaction Tax

Despite its benefits, STT has some drawbacks:

• Increases trading costs
• Affects market liquidity
• Impacts small and frequent traders more
• Paid regardless of profit or loss

Because STT is charged on every transaction, even loss-making trades attract tax.

STT vs Capital Gains Tax

STT and capital gains tax are different:

• STT: Charged at the time of transaction
• Capital gains tax: Charged on profits earned

Both taxes apply independently. Paying STT does not exempt you from capital gains tax.

How to Check STT Charged by Your Broker

You can check STT details in:

• Contract note
• Trade summary
• Ledger statement

Brokers clearly mention STT as a separate line item along with other charges.

Is STT Refundable?

STT is not refundable in most cases. Once paid, it cannot be claimed back, even if you incur a loss. Due to this reason, it is absolutely essential to understand what is securities transaction tax (STT) before actively trading.

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Key Takeaways

• Securities Transaction Tax is a direct tax on stock market transactions
• It is charged on equities, derivatives, and equity mutual funds
• Rates vary based on transaction type
• STT is automatically deducted by brokers
• It increases trading and investment costs
• Long-term investors feel less impact compared to traders

Understanding STT helps you make better financial and trading decisions.

Parting Words

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