The Superior Securities Transaction Tax in 2024

Securities Transaction Tax (STT) is being hyped a lot in the current tax system of India because it is a tax that is levied on the trading of securities, including stocks, bonds, derivatives and equity mutual funds, due to which Securities Transaction Tax (STT) helps a lot in generating revenue for India.

Securities Transaction Tax is considered to be a mechanism that is imposed to offset taxes on the purchase and sale of securities.

This is the reason that considering the current stock situation of our country, we believe that it is very important for every individual living in India to have an understanding about Securities Transaction Tax.

Therefore, our objective behind presenting this to you is to enable you to carefully understand all the aspects of Securities Transaction Tax like history, purpose, implications, global perspectives and more of the STT.

Budget 2024 Update

As per Union Budget 2024 by Nirmala Sitharaman Murthy, an order has been passed to increase the Securities Transaction Tax (STT) on futures from 0.0125% to 0.02% and all options from 0.0625% to 0.1%. And on all options from 0.0625% to 0.1% from 1st October 2024.

Understanding Securities Transaction Tax (STT)

In our country, the Securities Transaction Tax is placed in the category of such tax, which is levied on every transaction of securities listed on recognized stock exchanges. 

It’s important to note that this tax is not one-sided. It applies to both buyers and sellers, with rates that vary depending on the type of transaction, ensuring that all parties are equally considered. 

Also, let us tell you that the calculation of this tax is done as a percentage of the transaction value, the simple meaning of which is that the bigger it is, the more tax will be levied.

The Primary securities subject to STT include:

• Equity Shares: Securities Transaction Tax (STT) is levied only on transactions involving the purchase or sale of all equity shares.
• Derivatives: Options, futures, and other derivative instruments are also subject to perpetuity.
• Equity Mutual Funds: Continuous trading is applied when all units of an equity-oriented mutual fund are traded.

What is the History and Evolution of Securities Transaction Tax (STT)?

The concept of Securities Transaction Tax (STT) has been around for a long time in India and many other countries and has been adopted by various countries during different periods. 

The history of STT is a testament to the proactive response of governments to the challenges posed by increasing trading volumes and market complexity. This adaptability and foresight help ensure the stability and resilience of financial systems.

• In India, the introduction of Sustainability as part of the Act in 2004 was a strategic move to regulate short-term capital gains in the rapidly growing stock market. This measure not only generates revenue but also ensures that short-term capital gains are effectively taxed, providing clarity for investors.
• Other Countries: There are also a number of countries that have implemented a version of the STT, for example the United States has had a Securities Transaction Tax (STT) in place since 1914, also known as the “Section 31 levy” which provides funds for the overall operations of the Securities and Exchange Commission (SEC).
• Recent Trends: In the last few years, there has been a lot of discussion in India to increase STT, keeping this in mind, the Finance Minister has decriminalized STT in the Union Budget 2024, which we have mentioned in the blog post some time ago.

What are the Purposes of Securities Transaction Tax?

The introduction to STT, many purposes of our country India can be fulfilled which we have explained in detail below:

• Revenue Generation: Like all other taxes, STT is also considered a significant source of revenue generation. By imposing a tax on transactions in securities, the government of the country can raise a substantial amount of money, mainly where active and large financial markets are situated.
• Market Regulation: STT acts to curb speculative trading by making frequent buying and selling a little more expensive. This can bring a lot of stability to all marketplaces by reducing all the excessive volatility caused by high-frequency trading.
• STT significantly contributes to the transparency and simplification of our country’s tax system. By eliminating the need to calculate complex capital for each business, STT paves the way for the easy replacement of other forms of taxation on business profits, thereby simplifying compliance for all traders and the government.

How Does Securities Transaction Tax Works?

We have explained in detail below how Securities Transaction Tax works:

• Applicability: As you all have already been told that STT is applicable only on transactions related to equities, futures, options and other securities traded on recognized stock exchanges in India.

• Transaction-Based: This tax is imposed at a fixed percentage on the value of all transactions and these rates vary entirely depending upon the type of security and nature of transaction (buy or sell).
• Automatic Deduction: STT is automatically deducted by the stock broker during all types of transactions, after which it is sent to the government of our country.
• Separate from Capital Gains Tax: STT is considered independent of capital gains tax and is mandatory to pay it irrespective of the profit or loss on the transaction.
• Claimable Deduction: For all transactions of certain specific types such as equity delivery trades, STT paid can be claimed as a deduction. This provides a degree of control over your tax liabilities while computing capital gains tax.

What is the Impact of Securities Transaction Tax on Investors?

Due to Securities Transaction Tax (STT), investors are affected in many ways which we have explained very well in detail below:

• Increased Trading Costs: STT results in a significant increase in the overall cost of trading, which reduces the expected profits of investors, especially those who trade frequently.
• Discouragement of Speculation: This tax also deters high-frequency trading, as the cost of executing many trades increases due to the higher rate of tax.
• Lower Profit Margins: This tax impacts commissions, and this point is detrimental for investors since the tax can cut into their profit margins, especially if they have to execute high-volume trades or full-immersion transactions with low margins.
• Impact on Returns: Despite being a small portion of long-term investments, STT can actually erode the overall returns of ‘patient’ long-term investors.
• Market Liquidity: This tax may slightly distort market liquidity, as it discourages low-frequency, high-turnover trading, thereby affecting the ease or speed of executing a trade.
• Tax Deduction Benefit: STT paid can be used as an expense while computing the tax on achievable capital gains on share delivery transactions in order to allow a reduced quantum of tax to be paid by the long-term investors.

How is Securities Transaction Tax (STT) Calculated?

The overall levy of securities tax (STT) is seen as a percentage of the wholesale value of the securities traded called as the carry forward ratio which we have looked at in a good way for you all to understand.

Determine the Transaction Type: First, determine whether the transaction relates to equity, futures/options or equity-linked mutual funds. STT rates also vary depending on the type of security and whether it is a purchase or a sale.

Calculate the Transaction Value: Transaction value is calculated by multiplying the price at which the security has been bought or sold with the number of units that was done.

Apply the STT Rate: Multiply the transaction value by the appropriate STT rate. For example, based on the latest proposed rates for October 2024:

• For futures, STT is 0.02% of the transaction value.
• For options, STT is 0.1% of the transaction value.

Automatic Deduction: The stockbroker will calculate and deduct STT at the time of transaction and remit it to the government.

Example Calculation: If you buy 100 shares of a stock at ₹500 per share and the STT rate is 0.1%, your STT would be: 

• ₹500 × 100 × 0.1% = ₹50

What is the Security Transaction Tax Rate in India?

For your easy understanding, we have explained the Security Transaction Tax Rate in India in detail in a table:

How is Securities Transaction Tax (STT) levied in India?

If the securities are said to be traded on a recognised exchange, then the Securities Transaction Tax (STT) is levied. This tax is levied on both the buyer and the seller, even though the stock exchange has the liability to collect and pay the tax.

This STT, which is prescribed by the government, varies according to the type of security and transaction. For example, delivery trades in equities attract an STT of 0.1%. On the other hand, equity intraday trades attract an STT of 0.025%. 

In options trading, the STT is 0.05% of the premium, and in futures trading, it is 0.01% of the contract value.

While this is one way in which STTs generate revenue for the government, they do impose a cost of trading on investors. 

As a result, STTs should be taken into account in evaluating investment returns, and considered for financial planning purposes.

How is STT Levied on Physical Delivery of Derivatives?

The most common mode of delivery on derivative contracts is cash settlement, in which no physical movement of the underlying assets is made; only cash inflows or outflows are made. 

For such transactions, as required for regular transactions, STT of 0.001% is levied. Nevertheless, the SEBI circular dated April 11, 2018 defined a list of about 46 stocks on which physical delivery of shares would be possible instead of cash settlement of derivative contracts. This also led to discussions about the correct STT rate for such transactions.

Initially, Stock exchanges (SEs) started levying an STT of 0.1% on all these physically delivered derivative contracts, to match well with the STT rate for normal equity delivery-based business. 

This rate is substantially higher – it is at least 10  times higher than the rate for cash-settled derivative contracts. 

As such, the Association of National Exchange Members of India (ANMI) moved to the Bombay High Court to oppose this higher STT rate.

The Bombay High Court subsequently sought a ruling from the CBDT on this matter. In this regard, on 27/08/2018, CBDT clarified that where the derivative contract is settled through the delivery of shares, the same shall be treated as a delivery-based transaction like a standard equity share delivery transaction.

As such, the STT rate, which applied to delivery-based equity transactions, would also extend to these physically settled derivative contracts.

When Is Securities Transaction Tax Levied?

Securities Transaction Tax (STT) is charged on several forms of transactions of securities that are listed on exchanges approved under SEBI. 

The tax is levied in various steps of transaction flow with reference to the type of security and type of transaction. Here’s when STT is typically levied: Here’s when STT is typically levied:

• Equity Shares: STT is levied on acquisition of equity shares and also on transfer of such shares, where the transaction takes place through a recognized stock exchange.
• Equity-Oriented Mutual Funds: The STT is charged where units of equity-oriented mutual funds are traded on the stock market.
• Derivatives: STT is applied on the turnover of derivative contracts including future and option but at rate that maybe vary according to the physical delivery of shares or cash settlement.
• Intraday Transactions: For equity transactions during the particular day for buying and selling shares, STT is charged only on the selling side of the transaction.

In Conclusion

The preferred method of achieving this goal is to levy a securities transaction tax (STT), the utility of which includes the provision of government revenue and discouraging speculative trading. 

Although its main advantage is that it reduces the complexity of the taxation system by directly taxing securities transactions, it does have an impact on trading activity and market depth.

The STT is a comprehensive tax that applies to a wide range of securities and transactions. Its scope is not fixed but instead evolves with changes in market practices and the accompanying adjustments to the tax rules.

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