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Securities Transaction Tax (STT)

Securities Transaction Tax or STT is a tax being levied on all transactions done on the stock exchanges at rates prescribed by the Government of India.

Securities Transaction Tax (STT) is a tax being levied on all transactions done on the stock exchanges at rates prescribed by the Central Government from time to time. STT was introduced in the Finance Act 2004 and change multiple times after that.

The STT Rate differs based on the products segment (i.e. Eq Delivery, Eq Future etc) and transaction type (buy, sell).

The brokerage, service tax and STT are indicated separately in the contract note.

How is it calculated and charged?

STT Rates

Securities Transaction Tax is collected by exchange from the broker on behalf of the client and paid to the Income Tax Department of Government of India. STT is charged based on the segment and transaction type at the rate described below (as of Feb 2017).

  • Equity Delivery Trades: ₹10,000 per Crore or 0.1% (on both buy and sell)
  • Equity Intraday Trades: ₹2,500 per Crore or 0.025% (only on the sell-side)
  • Equity Futures Trades: ₹1,000 per Crore or 0.01% (only on the sell-side)
  • Equity Options Trades: ₹5,000 per Crore or 0.05% (of premium value)
  • Currency Derivatives: No STT
  • Wholesale debt instrument: No STT

Brokerage Calculator

Brokerage calculator offered by online stocks broker helps understanding the STT investor pays for the security transaction. As the rate of STT is the same, you could check the brokerage calculator on any online broker website. i.e. ProStocks Brokerage Calculator(ProStocks is a Mumbai based discount broker offering trades at ₹15 per trade.)

Key points about STT

  • STT is the largest fee paid by traders with discount stock brokers. In some cases, it is over 100 times more than brokerage itself.
  • STT increase the cost of trading significantly and affect investor behavior including saving, trading, and risk-taking.
  • It increases the breakeven point for Algo trading and Arbitrage and makes them riskier.
  • STT especially reduces the benefits through short-term trading. For the long-term, the cost of establishing an investment position is paid back over a longer period thus reducing STT's impact.
  • The futures markets dominance over option-market has drastically fallen following the increase in STT in recent years.

How has it evolved and impacted the volumes?

India taxes equity futures and options as well as the underlying shares. Futures are taxed based on their delivery price, while options are taxed both on the premium and on the strike price if exercised.

USA (in 1966), Germany(1991), Japan (1999), Australia (2001), France (2009), Canada, Mexico eliminated its stock transaction tax. This has boosted market participation and volumes significantly in these markets.

It has been observed consistently that STT along with capital gains tax (CGT) distort trading relative to a tax-free market.

India is among the countries with the highest taxes in stock markets. Other then brokerage, the investor pays taxes:

  1. Securities Transaction Tax (STT)
  2. Exchange Transaction Charges (i.e. ₹325 per Crore for equity intraday/delivery at NSE)
  3. SEBI Charges (₹15 per Crore)
  4. GST (18% on Brokerage + Exchange Transaction Charges)
  5. Stamp Duty (State-wise )
  6. Short-term capital gains tax (CGT)

Capital gains tax (CGT)

CGT is tax by Government of India on capital gains. India has two types of capital gain taxes:

  1. Short-Term Capital Gain Tax (STCGT) - Investor holds an exchange-traded stock, ETF or bond for less than 12 months before selling it. STCGT is charged at 15% tax under Section 111A of the Income Tax Act. The debt-oriented mutual funds don't come under Section 111A and the income through them goes to the regular income.
  1. Long-Term Capital Gain Tax (LTCGT) - Investor holds an exchange-traded stock, ETF or bond for over 12 months before selling it. As per 2018 tax law, LTCGT is charged at 0%, 15% and 20%, depending on your income.
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