Sunday, May 04, 2014

What is Securities Transaction Tax (STT)

Did you know that with every mutual fund or stock transaction, a TDS is being deducted by the government (by the name of Securities Transaction Tax or STT) and you may just be missing on asking for the refund. Let us understand more about STT.

What is STT?
Securities Transaction Tax (STT) is a tax levied on the sale and purchase of securities on stock exchanges in India. 

Why STT?
The thought behind introducing this tax was to ensure that profits arising from transactions in securities are taxed at source and evasion of tax is minimized. This also means that your stock broker or mutual fund house will pass this amount to the taxman. Apart from that, STT is believed to reduce the inflow of speculative money in the equity market.

Since when is it effective?
This tax was introduced in the Union budget of 2004 and was made effective from 1 October 2004.

What are the current STT rates?
The rate is set by the government and depends on the type of security and whether the transaction is a purchase or a sale. 
  • For purchase of delivery-based equity shares, 0.1% STT is charged on the turnover (total number of shares multiplied by the per share price). 
  • For sale of these shares, 0.1% is charged on the turnover.  
  • For equity intraday trades, there is no STT on buying, but on sale you pay 0.025% on the turnover. 
  • On equity futures transactions the STT applicable is at the time of selling at a rate of .01% of turnover. 
  • On selling options you have to pay STT of .017% of the premium and on buying options you pay 0.125% settlement price at the time of exercise. 
  • For equity Mutual Funds, you will now pay 0.001% on redemption.
How do you pay STT?
Typically, STT is included in the price of the security at the time of transaction. This means, if you are buying a Mutual Fund unit or a share of a company, STT will be included in the purchase price itself and the cost will increase by the amount of the tax. Similarly, at the time of sale, STT is deducted at source by the broker or the asset management company (for MFs).

Scope of STT
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 like nature in or of any incorporated company or other body corporate
  • Derivatives
  • Units or any other instrument 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 nature
  • Rights or interest in securities
  • Equity-oriented mutual funds
  • STT is not applicable for any off-market transaction.
So the next time, your broker or asset management company 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. 

Can you claim refund of STT?
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 deduct from your short term capital gains and get a tax credit for the same.

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