Securities Transaction Tax is one of the forms of tax that is payable directly within India on the number of tax-deductible securities when traded on an established stock exchange.
Tax on transactions in securities (most often referred to in the form of STT) was implemented during the Budget of 2004 and became effective in October 2004. The principal reason behind the introduction of STT is to stop tax fraud.
STT is a tax on turnover where the buyer must pay a specific tax on the amount paid or received through an exchange for shares. Futures, mutual funds, stock and exchange-traded funds fall within the scope of STT.
Did You Know?
While the preferred stock technically qualifies as equity security, it's often considered debt security as it behaves like a bond. Preferred shares are popular for income-seeking investors because they offer a fixed dividend rate. It provides fixed-income security.
What is Securities Transaction Tax or STT?
If we talk about securities transaction tax meaning, STT stands for a financial transaction tax, like tax at the base (TCS). STT is a tax directly imposed on each trade and acquisition of shares listed on acknowledged stock exchanges of India. STT is governed by the Securities Transaction Tax Act (STT Act). This act has specifically listed different tax-deductible securities transactions, i.e. transactions on which STT is a possibility.
Taxable securities are derivatives, equity and units of equity-oriented mutual funds. Also, it includes unlisted shares, which are sold as part of an offer to sell to the general public in IPO and when the shares are later listed on stock exchanges. STT is the amount that must be paid above and beyond transaction value. This increases the value of transactions.
STT is tax-free on taxable securities transactions. STT Act has also provided for the amount of the transaction STT has to be paid and who shall pay STT, i.e., the seller or buyer. The rate of STT will be determined by the government and adjusted periodically as needed.
Also Read: Capital Gains Tax - Capital Gains Tax in India & Its Types, Rates, Calculation
The collection provisions of STT function similarly to TCS and TDS. STT must be collected by a recognized stock exchange or by the person prescribed in the case of each Mutual Fund or the lead merchant banker in the case of an initial public offering or IPO, as the case may be.
it shall then be paid to the government by the 7th day of the next month. In case the persons mentioned above are unable to collect the tax. However, they are still required to pay the equivalent quantity of tax to the credit of the Central Government within the 7th of the month following. Failure to collect or remit the amount collected will result in a levy of interest and penalties.
Securities Transaction Tax (STT) Return Filing & Due Date
Anyone required to contribute Securities Transaction Tax (STT) must pay the amount by the 7th of the following month that the Securities Transaction Tax is collected/deducted.
- Recognized Stock Exchange should prepare an annual return with the prescribed format by the 30th day of the Financial Year succeeding the Financial Year that the Securities Transaction Tax is collected
- All Recognized Mutual Funds must prepare an annual report with the prescribed format by the 30th day of the Financial Year succeeding the Financial Year during which the Securities Transaction Tax is collected.
Features of Securities Transaction Tax
STT is a simple direct tax, making it simple to calculate and levy. Here are a few of the distinctive features of STT:
- All sales transactions that involve options or futures will be subject to an STT cost.
- The clearing members' STT obligation will be equal to the sum of STT taxes due by the trading members under his supervision.
- Each future trade is recognized as the price it was traded to serve STT purposes, while a trading option is assessed at the premium.
- STT tax rates depend upon the kind of security. The number of sales or purchases also influences it.
- STT is calculated at the source to cut down on tax avoidance. It is impossible to avoid tax or combine it with capital gains or losses to include in your tax return unless you are dealing in shares professionally. Tax professionals can file STT on their tax returns for income.
- The Central Government of India is in charge of deciding the amount of STT taxation.
Securities Transaction Tax Rate in India
The government determines the tax rate for STT, which is contingent on the type of security. STT provides terms for the prompt and transparent payment of taxes in trading instruments. STT will also guarantee that cash flow from speculative investments is reduced in all markets. The table below outlines the tax rate at which various securities are taxed.
|
S.No. |
Taxable Securities Transaction |
Payable By |
Rate of taxation |
|
1 |
Sale of an option in securities |
Seller |
0.02% |
|
2 |
Sale of a futures in securities |
Seller |
0.01% |
|
3 |
Sale of an option in securities (option is exercised) |
Purchaser |
0.13% |
Securities on Which STT Is Applicable
The following table includes the information about the taxable securities transaction, rate of STT and responsible person to pay STT.
Securities Transaction Tax and Income Tax
The taxation on earnings through trading in stocks is determined largely by the motive behind the trade. People can trade stocks to make a profit or for investment purposes. The amount of STT the government imposed differs in both circumstances.
The two heads below can be distinguished based on this feature:
-
Earnings Come From Share Trading as a Profession
This scenario occurs when making money through trading in stocks is a business option and executed professionally. In these instances, profits and losses from trading are accounted for as company income.
These are then taxed according to the regular tax rates for income. Section 36 in the Income Tax Act allows for an exemption for the tax on securities transactions paid out on the income derived from taxes.
-
Capital Gains From Income
If the assessee is a self-employed or salaried individual who engages with stocks to invest in and securities trading is not the primary field of work, the income from capital gains can be considered. When the stocks are held, the number of profits or losses may be classified as either short-term capital gains or long-term gains.
Short-term capital gains apply to stocks with an average holding time of less than a year. In contrast, long-term capital gains can be applied to stocks with an average holding period of more than one year.
Capital gains that are long-term in nature are tax-free. Short-term capital gains can be taxed at a rate of 15 per cent. Do you want a tip to boost traffic on your business platform? Look through the best instagram business tips to get an awesome boost in your income.
STT on Physical Delivery of Derivatives
The petition was filed in the name of the Association of National Exchange Members of India (ANMI) against the stock exchanges in the Bombay High Court to address the issue of levies, which is 0.1% STT for physical distribution of derivatives.
The High Court has sought the opinions of the Central Board of Direct Taxes (CBDT) in this respect. The CBDT has responded and provided a clarification date of 27 August 2018.
It clarifies that when the derivative contract is settled through physically delivering shares, this transaction is similar to a transaction involving equity shares when it is settled through the actual delivery of shares. So the STT rate applicable to delivery-based equity transactions would apply to derivative transactions, too.
Also Read: How To Calculate Income Tax On Shares Selling - Calculate Capital Gains Tax On Shares
When is Securities Transaction Tax Levied?
A Securities Transaction Tax is imposed for each sale and purchase of equity traded in a domestic and regulated stock exchange. The central government decides the tax rate. Every stock market transaction that includes equity derivatives or equity such as options and futures is tax-exempt by the STT Act. STT is assessed at the time exchange of shares is completed.
This allows STT to be efficient, transparent and efficient. Since tax is charged immediately after the transaction occurs, incorrect payment, instances of non-payment, etc., are reduced to a minimum. The result, however, is that it raises the number of transactions.
Conclusion
Every sale and purchase of shares listed on a national and recognized stock exchange is subject to tax on transactions in securities. The government decides on the amount of taxation.
After completion of a share transaction, STT comes into act. In the end, STT is fast, simple and effective. For further inquiries, drop comments. Do you know measuring your business profit or loss is too simple now as it doesn't include calculations? Just look into Khatabook for this.
Follow Khatabook for the latest updates, news blogs, and articles related to micro, small and medium businesses (MSMEs), business tips, income tax, GST, salary, and accounting.
