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Securities Transaction Tax - An Overview

Ayisha Anis 
on 23 October 2020

LinkedIn


Update:

In light of COVID-19 pandemic, interest rate for delayed payments of STT made between 20th March, 2020 and 30th June, 2020 have been reduced to 9% per annum. 

Contents:

Introduction

Definition: Securities Transaction Tax is a tax levied on the purchase and sale of securities listed on stock exchanges in India. It is levied at source and it seeks to mitigate tax evasion, particularly, by stock market players who manage to avoid capital gains tax. It covers transactions relating to stocks, futures, options, mutual funds and exchange traded funds.

Description: STT was introduced in the Finance Act, 2004 and came into effect from 1 October 2004. It is leviable on taxable securities transactions. The act lays down the value of the transaction over which tax is payable as well as the rates at which it is to be paid. However, the Government may modify the rates from time to time.

Securities Transaction Tax - An Overview

Scope of STT

The term 'Securities' as per the definition in the Securities Contract (Regulation) Act, 1956 includes those assets that are liable for STT. These constitute the following:

• Bonds, stock shares, scraps, debenture stock, or any other securities that can be marketed or are of similar nature to this.

• Any derivatives or units that have been obtained by the collective investment schemes.

• Any securities under the Government that is of equity nature.

• Units of the mutual funds that are equity oriented.

• Securities that contain personal rights or interests.

• The debt instruments that are under security

STT is charged in addition to the value of the transaction and it increases the total transaction value.

STT Rates Applicable to Transactions

S.No

Type of Transaction

Type of Securities

STT Rate

Who Will Pay STT

1

Purchase - Delivery based

Equity Share

0.1%

Buyer

2

Sale (Delivery based)

Equity share

0.1%

Seller

3

Sale (Delivery based)

Equity-oriented MF unit

0.001%

Seller

4

Sale (non-delivery based)

Equity share or Equity-oriented MF unit

0.025%

Seller

5

Intra-day transaction

Equity share or Equity-oriented MF unit

0.025%

Seller

6

Sale of an option

Derivatives

0.017%

Seller

7

Sale of an option (where the option is used)

Derivatives

0.125%

Buyer

8

Sale of futures

Derivatives

0.01%

Seller

9

Sale

Exchange-traded funds (ETFs)

0.001%

Seller

10

Sale

Unlisted shares under IPO that are eventually listed on stock exchange

0.2%

Seller

Valuation of Taxable Securities Transaction

The value of a taxable securities transaction, being a purchase or sale of an equity share in a company or a unit of an equity oriented fund, entered into in a recognised stock exchange, shall be determined in accordance with the mode of settlement.

Mode of Settlement

Value of Taxable Securities Transaction

Netted Settlement Mode

Settlement of transactions in a recognised stock exchange where the quantity of an equity share or unit purchased by a person on a trading day is set off against the quantity of that equity share or unit sold by him on that day and actual delivery is required to be taken or given by him as the case may be, only in respect of the net quantity purchased or sold as has not been so set off.

In case of Purchase/Sale :

(i) Determine the trade value of each such trade on a trade day

(ii) Aggregate trade value of all trades on that day

(iii) Divide the aggregate trade value by total quantity of equity share or unit traded on that day to determine volume weighted average price.

(iv) Round off to nearest paisa to get value of taxable securities transaction

Trade-for-Trade Settlement Mode

Settlement of transactions in a recognised stock exchange where each trade is compulsorily required to be settled by actual delivery

In case of Purchase/Sale :

The price at which the equity share or unit is purchased or sold

Auction Settlement Mode

Settlement in a stock exchange, of transactions carried out in the auction session, being a trading session in which the stock exchange makes purchases of equity shares or units through an auction process initiated by it, so as to settle transactions where there has been a failure to deliver such equity shares or units which were required to be delivered.

In case of Purchase:

The volume weighted average price of the equity share or unit, determined as above, in respect of all trades in that equity share or unit carried out in the auction session.

In case of Sale :

The price at which the equity share or unit is sold.

 

Rounding Off

The value of taxable securities transaction and the amount of STT, interest and penalty payable, and the amount of refund due, shall be rounded off to the nearest rupee and where such amount contains a part of a rupee of fifty paise or more, it shall be increased to one rupee and if such part is less than fifty paise it shall be ignored.

Collection, Recovery and Payment of STT

Every recognised stock exchange shall collect the STT from every person, being a purchaser or a seller, as the case may be, who enters into a taxable securities transaction in that stock exchange, at the rates specified.

The prescribed person in case of every Mutual Fund shall collect the STT from every person who sells a unit to that Mutual Fund, at the rate specified. Such person may be the trustee of the Fund, or such other person managing the affairs of the Mutual Fund as may be authorised by the trustee in this behalf.

The lead merchant banker appointed by a company or business trust in respect of an IPO shall collect the STT from every person who enters into a taxable securities transaction.

Person responsible for collection and recovery of STT, shall pay the amount of such tax to the credit of the Central Government by remitting it into any branch of the Reserve Bank of India or of the State Bank of India or of any authorised bank accompanied by a STT challan.

 

Income Tax Exemption for STT

The Income Tax Act of 1961 allows for an exemption from STT, only if it is claimed as business expenditure. This means that capital income from securities must appear under the 'Profits/Gains from Business and Profession' section, implying that the taxpayer is undertaking trading of securities as part of the profession/business.

However, if share trading has been undertaken from an investment point of view by a salaried or a self-employed person, then STT charged on capital gains made from the transaction of securities is not exempted. Till recently, long term capital gains on sale of shares or equity oriented mutual fund units (EOMF) subject to STT were taxed at beneficial/Nil rate. But Finance budget 2018 proposed to withdraw this exemption and tax such long term capital gains at a concessional rate of 10% with respect to transfers effected on or after 1 April 2018. The cost of acquisition of shares or EOMF acquired before 1 February 2018 will be “grandfathered” i.e. , they will be replaced by fair market value as on 31st January 2018.


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