STT is levied on purchase or sale of securities that are listed on the Indian stock exchanges. This would include shares, derivatives, or equity-oriented mutual funds units,
Securities transaction tax (STT) was introduced in India a few years ago to curb tax avoidance on capital gains. Earlier, many people usually didn’t declare their profits from sale of stocks and avoided paying capital gains tax. As a result, the government could tax only those profits that had been declared, thus resulting in loss of revenue to the former.
To control this situation, the then Finance Minister P Chidambaram, in the Union Budget 2004-05, introduced STT. Transactions in stock, index options, and futures would also be subject to the transaction tax. This tax is payable whether you buy or sell a share and gets added to the price of the stock at the time the transaction is made. Since brokers have to automatically add this tax to the transaction price, there is no way to avoid it.
The Finance Ministry has supported the introduction of the STT to simplify the tax regime on financial market transactions. According to the ministry, STT is a clean and efficient way of collecting taxes from the financial markets. In the words of Chidambaram, “STT is a neat, efficient, and easy-to-administer tax and it has the great advantage of virtually eliminating tax avoidance.”
The rate of STT that is deducted is determined by the central government, and it varies with the type of transaction and security. The broker or asset management company (AMC) deducts STT at the source, i.e. at the time of the transaction itself; the net result is that it pushes up the cost of the transaction.
- According to the Securities Contracts (Regulation) Act, 1956, STT would be applicable on following securities:
- Shares, bonds, debentures, debenture stock, or other marketable securities of a similar nature, or of any incorporated company, or other corporate bodies
- Units or any other instruments issued by any collective investment scheme to the investors in such schemes
- Security receipt as defined in section 2(zg) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002
- Government securities of equity in nature
- Rights or interest in securities
- Equity-oriented mutual funds
- STT is not applicable for any off-market transaction
- In the Union Budget 2017-18, STT on equities and mutual fund units was cut. STT reduction on ETF is expected to enhance returns with lower transaction costs
- STT charge on equity futures is cut from 0.01%. In the previous Budget, STT was slashed to 0.1% on cash delivery transactions
- STT charge on redemption of mutual funds or ETFs (exchange-traded funds) at fund counters is reduced to 0.025%, while STT on the sale of MFs or ETFs on stock exchanges is cut from 0.1% to 0.001% levied only on the seller
So the next time, your broker or AMC sends you your transaction bill or statement, remember that the extra bit you are paying over and above your transaction is nothing but the tax that has been levied.
Whether it is purchase and sale of shares or mutual fund units, STT will stay and cannot be avoided. At the end of the year, you can ask your broker to give you a certificate of the STT that you have paid through the year. You can use this amount to claim a deduction from your short-term capital gains and get a tax credit.