In the year 2004, the government introduced a new tax called the Securities Transaction Tax or STT. It was created with the aim to curb tax evasion in case of capital gains resulting from buying and selling of shares. This guide by H&R Block will help you understand STT in depth.
Securities transaction Tax is a type of tax levied on capital gains occurring from share transactions. It works just like TCS, i.e. the seller of shares collects tax at source from the buyer of shares. However, it is applicable to share transactions occurring through recognised stock exchange and not on off market share transactions.
The Securities Transaction Tax Act which covers the provisions for the levy and collection of STT does not define the term securities. However, it allows the meaning for the said term to be borrowed from the Securities Contracts (Regulation) Act, 1956, we can infer that securities include:
Hence, STT is levied on all the securities mentioned above.
|Taxable securities transaction||Rate of STT||STT to be paid by||Value on which STT is levied|
|Delivery based purchase of equity share||0.100%||Purchaser||Price at which equity share is purchased*|
|Delivery based sale of an equity share||0.100%||Seller||Price at which equity share is sold*|
|Delivery based sale of a unit of oriented mutual fund||0.001%||Seller||Price at which unit is sold*|
|Sale of equity share or unit of equity oriented mutual fund in recognised stock exchange otherwise than by actual delivery or transfer and intra day traded shares||0.025%||Seller||Price at which equity share or unit is sold*|
|Derivative – Sale of an option in securities||0.017%||Seller||Option premium|
|Derivative – Sale of an option in securities where option is exercised||0.125%||Purchaser||Settlement price|
|Derivative – Sale of futures in securities||0.010%||Seller||Price at which such futures is traded|
|Sale of unit of an equity oriented fund to the Mutual Fund – Exchange traded funds (ETFs)||0.001%||Seller||Price at which unit is sold*|
|Sale of unlisted shares under an offer for sale to public included in IPO and where such shares are subsequently listed in stock exchanges||0.200%||Seller||Price at which such shares are sold*|
Capital gain on securities transactions are taxed differently based on the purpose of share trading which can either be investment or business.
If the taxpayer in question is a salaried or self-employed person who has not taken up share trading as a business or profession but only as a means of investment then the resulting profits are considered income from capital gains. If the holding period is less than one year, then the capital gains are considered short term capital gains and if the holding period exceeds one year, it is considered long term capital gains.
Section 10(38) of the Income Tax Act gives tax benefit to the taxpayers incurring STT. Any short-term capital gain on the sale of shares or equity oriented mutual funds which are subject to STT are taxed at a concessional rate of 15% while LTCG are exempt from tax.
However, to prevent abuse of exemption provision, the government proposed the withdrawal of exemption on LTCG on equity shares and EOMF and tax them at concessional rate of 10% on transactions occurring on or after 1 April 2018. However, LTCG accrued till 31 January 2018 are grandfathered. It means that in case of transactions which occurred on or before 31 January 2018, cost of acquisition of shares or EOMF acquired before 1 February 2018 will be replaced by fair market value as on 31 January 2018.
If the taxpayer has taken share trading as a business or profession, his losses and gains from trading are considered business income.
When the income from share trading is considered business income, it is taxed as per the regular tax slabs prescribed by the government. No STT is levied in this case.
Let’s understand STT calculation with the help of an example. A trader buys 2,000 shares at Rs 20 each and sells them for Rs 30 each and both buying and selling occur on the same day. In this case, there is a profit on which intra-day STT rate will be applicable which is 0.025%. However, STT will be calculated as follows:
STT = 0.01 x 50 x 100 x 10 = Rs 500
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In general, derivatives contracts are settled in cash without physical delivery of shares. Contracting parties pay and receive only profits. The rate of STT on such transactions is 0.01%. SEBI lists down 46 stocks for which derivatives contract should be settled by the way of physical delivery of shares which are delivery-based transactions. Therefore, rate of STT will be same as on equity transactions.
Every recognised stock exchange or trustee of every Mutual Fund or a person authorised by the trustee to manage the affairs of Mutual Fund on behalf of trustee who is required to collect and pay STT under section 100 is required to pay it to the government by remitting the money into any branch of RBI, SBI or any other authorized bank with the help of STT challan. The tax should be paid by 7th of the month in which STT is collected or deducted.
Recognised stock exchange or Mutual Fund is required to file an annual return in prescribed format on or before 30th June of the FY in which such STT has been collected or deducted.