Securities Transaction Tax meaning: Securities Transaction Tax, also referred to as STT, is a tax that is levied on the purchase or sale of shares and other trade-able securities of the companies listed on the stock exchange. Governed under the Securities Transaction Tax Act, or the STT Act, the tax is levied on specifically listed taxable securities including equity, derivatives, units of equity-oriented mutual fund. Introduced in Union Budget 2004 by former Finance Minister P Chidambaram, this transaction tax was imposed in lieu of lower tax on short-term capital gain (LTCG) and ‘nil’ long-term capital gain (LTCG) tax on equities. However, in 2013, the tax rate was cut, following years of protests by brokers as well as the trading community.
How is Securities Transaction Tax Calculated?
Governed under Securities Transaction Tax Act, or the STT Act, the tax is levied on specifically listed taxable securities including:
- Equity, derivatives
- Units of equity-oriented mutual fund
The securities transaction tax is calculated as a percentage of the unit value of the security being traded. Note the following pointers:
- It could be as low as 0.001 per cent or as high as 0.2%
- The rate of tax varies based on the type of securities that are traded and in addition, the nature of transaction that is made
- It differs on the purchase and sale of securities and this is decided by the central government
- STT gets added to the stock price at the time the transaction is made and gets automatically added to the transaction price
- So, it’s difficult to avoid paying the tax. The broker or asset management company is bound to deduct the STT at source
Securities Transaction Tax Rate
During 2014-2019, the securities transaction tax rate was at 0.1 per cent for delivery-based equity trading. STT is not applicable on off-market transactions or commodity or currency transactions.
Similarly, buyers don’t need to pay any tax while making purchase of an equity-oriented mutual fund. The sale of a unit of an equity-oriented fund to the Mutual Fund – exchange-traded funds (ETFs) attracts STT at the rate of 0.001 per cent of unit value. Note that these rates are decided by the central government and the tax is not levied on any off-market transaction.