Updated Jan 30, 2022

What is Security Transaction Tax (STT) ?

What is Security Transaction Tax?

The Security Transaction Tax (STT) was initially implemented in the Union Budget of 2004 and is now in effect. Following the discovery of capital gains tax avoidance incidents via genuine and fraudulent losses, the concept of STT was conceived and developed. The goal of introducing the STT was to reduce the amount of money kept out of the country by those who made money by trading in securities.

For this reason, the STT was established as a means of achieving the true potential of taxing the stock markets. Consequently, even though long-term capital gains (LTCG) tax was exempted, STT was implemented to ensure that no tax avoidance occurred. Finally, in 2019, long-term capital gains (LTCG) also came under the purview of tax.

Understanding the STT

The Securities Transaction Tax, sometimes known as the STT, is a tax applied on the trading of securities. STT rates for equity (cash) transactions and futures and options (F&O) transactions are calculated differently. STT is a tax charged on transactions that take place on the National Stock Exchange (NSE), the Bombay Stock Exchange (BSE), and other approved stock exchanges in India.

Equity, derivatives, and units of an equity-oriented mutual fund are examples of taxable securities. STT is a tax levied on taxable securities transactions and also specified the amount of the transaction on which STT is required to be paid and the person accountable for paying STT, which might be either the buyer or the seller. The rate of STT, on the other hand, will be determined by the government and may be adjusted from time to time if required.

Like TCS or TDS, STT's collection provisions function similarly. When an initial public offering (IPO) is made, the lead merchant banker or recognized stock exchange is obligated to collect STT and pay it to the government by the 7th of the following month. These people are nonetheless required to release an equal sum of tax on the acknowledgment of the central government within seven days after they fail to collect the taxes. In addition, interest and punitive repercussions will be levied if the collected funds are not collected or remitted.

Securities on which STT is applied

The Securities Transaction Tax (STT) is levied on various transactions that take place on the Indian stock exchanges, including stock purchases and sales. Securities contract transactions that fall within the following categories are regulated under the Securities Contract Statute of 1956:

• Derivatives that are traded on the stock exchange
• Customers who buy shares in a mutual fund or another collective investment plan
• Equity-like obligations issued by governments
• Financial assets, such as stocks and bonds
• Investments in equity-trading-based mutual funds
• Financial instruments that may be traded on the stock market such as stocks and bonds

STT on Capital Gains

Under current Income-tax Act regulations, long-term capital gains are taxed at a higher rate than short-term capital gains because they rely on the length of time that an investor has held the instruments in question. Transfers of securities result in short-term capital gains that are taxed at the appropriate rates. Capital gains on long-term investments are taxed at 20% once inflation is taken into account by indexing the purchase price. Long-term profits on publicly traded assets may be taxed at 10% but without indexation. Long-term capital gains and short-term capital gains are taxed at 10% (without indexation) and 30%, respectively, for foreign institutional investors (FIIs). Trading in securities, however, is taxed like any other company revenue.

According to the proposal, taxes of 0.15 percent are planned for all acquisition transactions of stocks in a recognized Indian stock exchange. It is the stock exchange's responsibility to collect and remit this tax on behalf of the federal government. Chapter VII of the Finance (No.2) Bill, 2004 contains the provisions for the proposed tax.

Further, Section 10 of the Income Tax Act can be amended to include clause (38) to exclude stocks traded on the stock market from long-term capital gains. Also, a new Section 111A and 115AD of the Income Tax Act are proposed to be included so that short-term capital gains on the sale of such assets to an investor, including FII, are levied at 10%.

When is STT levied?

Every time you buy or sell shares listed on a domestic or recognized stock exchange, you'll be hit with a securities transaction tax. The government sets the rate at which taxes are levied. The STT statute applies to all stock market transactions involving equities or equity derivatives, such as futures and options. A share transaction's STT is levied immediately. As a result, STT is streamlined, open, and efficient. There are few non-payments, incorrect payments, etc., because the tax is assessed as soon as a transaction occurs. However, the cost of transactions rises as a consequence of this.

Conclusion

Securities transfer taxes (STT) are implied by the finance ministry of India and hence it cannot be avoided when buying and selling stocks or mutual fund units. You may get a certificate for the STT you paid at the end of the year. As a business cost, you may deduct this amount from the different taxes that are incurred in the financial year.