What is Security Transaction Tax?

To boost revenue and balance the securities market, the government introduced the Securities Transaction Tax (STT) on securities transactions. Securities Transaction Tax (STT) is a direct tax imposed on the purchasing and selling of securities such as shares, bonds, and derivatives. Former Finance Minister P. Chidambaram introduced the Securities Transaction Tax in the year 2004 through the Finance Act to prevent capital gains tax avoidance. Further, in 2013, the government reduced the amount of taxation for STT after several years of protests.

Recent Update on Securities Transaction Tax (STT)

From 1 October 2024, the Securities Transaction Tax (STT) on Futures & Options (F&O) of securities has proposed to be increased from 0.0125% to 0.02% and 0.0625% to 0.1%, respectively. Also, the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) have embraced a consistent fee structure.

The Securities Transaction Tax (STT) is levied directly on securities transactions to limit speculative trading and increase revenue from the financial markets. The Securities Transaction Tax Act governs STT and covers transactions involving equity shares, equity-oriented mutual funds, and derivatives, as well as unlisted shares sold through an offer for sale and later listed on stock exchanges. 

Let’s understand with an example: If you buy 500 shares of XYZ Bank at Rs. 1,000 per share for delivery and hold them in your Demat account, a STT charge of 0.1% (STT rate) x Rs. 1,000 (buying price) x 500 (shares) = Rs. 500 would be levied on the transaction. This STT fee will be deducted by the broker at the time of purchasing the shares.

The STT levy significantly affects traders, investors, and the financial market, making it crucial to understand.

Key Features of Securities Transaction Tax (STT)

STT- Securities Transaction Tax is a simple direct tax that is easy to calculate and impose. A few features of Securities Transaction Tax (STT) are:

Applicability to Specific Transactions

STT applies to the buying and selling equity shares listed on recognised stock exchanges as well as futures and options transactions in the equity segment. 

Revenue Generation

The government introduced STT to generate revenue. The tax collected from securities transactions can fund many public welfare initiatives, government expenditures, and infrastructure development without significantly burdening investors, as it is a small amount of the transaction value.

Varied Tax Rates

Security Transactions Tax rates vary depending on the nature of the transaction and the security type. 

How is Securities Transaction Tax Calculated

The STT is a tax levied on buyers and sellers on the value of securities transactions. The tax rate differs depending on the security type and whether you’re buying or selling. For example, when you sell equity shares, an STT of 0.1% is applied, but when you sell a unit of mutual fund, an STT of 0.001% is applied to the transaction value. The stock exchange deducts the tax and deposits it with the government, making it a simple process for the investor.

SST Example with Calculation

The exchange or broker calculates STT as a percentage of the transaction value, depending on the transaction type and the value of securities traded. 

Let’s understand “how STT is calculated” with an example:

Let’s assume you have purchased 500 shares of a company at Rs. 20 per share. If the applicable STT rate for this transaction is 0.1%, the total STT amount would be:

Transaction value = 500 shares * Rs. 20 Per share = Rs. 10,000

Then, STT = 0.1% of Rs.10,000 = Rs. 10

In the end, your account will be debited by Rs. 10,010 (Rs. 10,000 for the shares + Rs. 10 for STT).

Securities Transaction Tax Rates in India

We know the STT rates have changed during the announcement of the Union Budget 2024. Listed stock exchanges, recognised entities or merchant bankers must collect STT from investors and deposit it with the government before the 7th of every month. STT rates depend on the underlying asset type and volume, as the government fixes and revises the rates occasionally. 

Let’s take an example: Suppose you have invested Rs 3 lakh in equity-oriented mutual funds. Now, the market appreciates, and your Mutual Funds value increases to Rs 4 lakh. So, STT will apply to Rs 4 lakh at the rate of Rs 0.001% and Rs. 4 will get collected by the AMC.

While a different STT rate is applied to intraday trading’s equity shares. In case of intraday trading, the rate applied for STT is 0.025%.

For example, you have bought 500 shares at the rate of Rs. 10 per share and selling those for Rs. 20 per unit, STT will be calculated as,

Total STT amount calculated as (0.025*20*500) = Rs. 250

Also Read: What is Commodity Transaction Tax: Calculation and Impacts

Below is the updated STT rate table:

Impact of Securities Transaction Tax on Investors

The government imposes a Securities Transaction Tax on the purchasing and selling of securities such as mutual funds, stocks, and derivatives, which significantly impacts investors. Although SST charges are small, they reduce investors’ returns.

A few of the impacts of Securities Transaction Tax on investors are:

1. Decreased Market Liquidity: Reduced trading volume can lead to lower market liquidity as some investors may choose to avoid trading in securities that draw higher STT rates. This affects the total trading volumes and leads to lower market liquidity.

2. Increased Transaction Costs: The STT boosts the trading cost, reducing investors’ returns, making it difficult for investors to earn profit and affecting their investment choices.

3. Impact on profitability: STT has a great impact on the profits of transactions as it directly reduces the gains from successful transactions and increases the losses from unsuccessful ones, which can affect the entire portfolio performance.

4. Effect on Investment Strategy: The STT can affect investors’ investment strategies. As their focus can shift to securities that attract lower STT rates rather than securities that attract higher SST rates. 

The impact of SST on investors relies on several factors, such as the type of security, investors’ investment strategies, and frequency of trading. While the STT generates revenue for the government, it is crucial to assess its effects on investors and the overall securities market. 

Conclusion

The Securities Transaction Tax (STT) is essential for generating revenue for the government and regulating India’s securities market. The primary goal behind charging STT is to facilitate tax collection on trading activities. By knowing the applicable STT rates and the nature of transactions subject to STT, investors can precisely determine the cost of transactions and adhere to the regulations. At last staying up-to-date with the latest news about STT as it is crucial for making better investment decisions.