Introduced in the Finance Act 2004, Security Transaction Tax is a tax being imposed on all transactions such as sale/purchase transactions. This security transaction is applied on the stock exchanges at rates prescribed by the Central Government from time to time. It is an indirect tax which was made to lower the tax on short-term capital gains and to make the long-term capital gains released from the levy of any tax. Among all the other countries, India has the highest taxes in stock markets. STT is the largest fee paid by traders with discount stock brokers. In some cases, it’s over 100 times more than the brokerage itself.
Taxation of profit or loss from securities transactions depends on the activity of purchasing and selling of shares/derivatives which is classified as an investment activity or business activity. Treatment of STT depends upon whether the pay from these securities transactions should include in the ‘Profits and Gains of Business’ or under “Income from Capital Gains”.
An independent study by Securities and Exchange Board of India suggested STT on protective-put and hedged-call positions that should be reduced to give a boost to the market. Many traders would not disclose profits made in the equity market and sidestepped tax on capital gains. But this system is changed in the last 10 years with the introduction of STT. The tax is collected by the broker along with other transaction charges such as stamp duty and exchange house levy and passed on to the Centre.
Long and Short Term Capital Gain
To neutralize some of the negative impacts, long-term capital gains tax on equities were removed and short-term capital gains tax reduced to 10 percent. Currently, a delivery trade in cash market attracts STT of 0.1 percent on traded turnover levied both at the time of purchase and sale of shares. Gain or lose is subject to Short-Term Capital Gains or Long Term Capital Gains tax depending upon the period of holding, i.e., if the holding period is equal to or greater than one year, gains is classified as LTCG and if the holding period is less than one year, gains is classified as STCG.
STT of 0.025 percent on intra-day trades is not much but for a day trader, it is a certain increase in cost. STT can form 40-50 percent of the total transaction cost on equities. Other transaction charges include brokerage (of 0.01-0.03 percent on intraday), stamp duty (0.002 percent in Mumbai), exchange levy (NSE’s is 0.00325 percent) and service tax.
STT on Mutual Funds
Every sale or purchase of securities which are listed on the Indian stock exchange is imposed with STT. This would include shares, derivatives or equity-oriented mutual fund units. The rate of tax that is deducted is determined by the central government, and it varies with different types of transactions and securities. Securities transaction tax is deducted from equity mutual fund units at the time of redemption, when switched to other schemes, a sale of units and not on their purchase. STT is not applicable on off-market transactions.
Who deducts the STT?
STT is a neat, efficient and easy-to-administer tax that virtually eliminates tax avoidance. Asset management company and brokerage houses deduct STT at source while executing the transaction. If an investor redeems his mutual fund units then AMCs are authorized to deduct at the source level, while if an investor sells his/her units to others through stock exchange then the respective brokerage house through which the client has sold will deduct the STT at the source. STT will be applicable in the case of a transaction that takes place in the exchanges. For availing the exemption in the case of long-term capital gain, the asset under consideration has to be subjected to STT. It is applicable on all selling transactions for both options and futures contracts. For the purpose of STT, each future trade is valued at the actual traded price and options trade is valued at a premium.
STT is applicable at different rates depending upon the transaction (whether purchase or sell) and the security (whether equity or derivative). After simplifying the tax structure and reducing it further the key is to increase the participation, which makes the market strong and less volatile.