7 key questions around Securities Transaction Tax |what is STT tax?

If you ever decide to invest in the stock market through a broker, they will probably send you a transaction bill or a statement to avail their services. Brokers buy and sell the shares on your behalf and so send you a transaction bill. 

What is Securities Transaction Tax or STT?

You might notice in your statement that there is payment over and above your profit and loss transaction. This is nothing but the tax that the government has decided to charge you. If you are purchasing and selling shares in the market or mutual fund units, you have to pay something called Securities Transaction Tax or STT.

Why was Securities Transaction Tax Introduced?

Before we understand what the STT term means, let us know the reason why STT was introduced. Nobody likes to hear the word tax! In India, most people dealing in the stock market have the habit of evading taxes. Tax evasion means when we try to adopt illegal means, like hiding our income, to escape payment of taxes.

Paying taxes is unwelcome in most cases, and so, the government had decided to discipline everyone.

Securities Transaction Tax is the result of tax evasion by people on Capital Gains Tax. What is Capital Gains tax, you might ask? Well, any profit or gain you get from the sale of a capital asset is a capital gain for you. There is short term capital gains tax where 15% tax is charged. Then, there is long-term capital gains tax, which invites 10% tax. Long-term capital gains tax is charged when you sell your securities worth more than 1 lakh.

Capital assets are jewelry, land, building, vehicles, and property. It also includes equity or preference shares in a company listed on a recognized stock exchange in India.

When was Securities Transaction Cost introduced in India?

The government announced this tax during the Union Budget of 2004-2005. The then financial ministry introduced this tax under the leadership of P. Chidambaram. During the same year, the finance minister, P. Chidambaram, introduced other measures like taxing corporate unit holders of mutual funds, tonnage tax for the shipping industry, etc.

The finance ministry said that STT would help collect taxes cleanly and efficiently in the financial market. 

It is to be noted that STT has to be paid irrespective of whether you earn a profit or a loss in purchasing and selling securities in the financial market.

What is the meaning of each word in STT Securities, Transaction, and Tax?

➢  What are Securities?

 Securities are financial instruments that are tradable. We can say that securities are shares, bonds, and debentures. Companies and governments both issue securities. 

When businesses issue securities like bonds and stocks in the market, investors like you and me buy them and provide that particular company with adequate funds for their needs. 

If you have bought security from the stock market, it means that you have made an investment in that business, hoping to get good returns in the future.

Securities can be debt securities or equity securities. Financial assets that are created when one party lends money to another are debt securities like government bonds, municipal bonds, or preferred stock. Equity securities are investments in a stock issued by other companies.

➢  What is Transaction? 

 When you buy and sell these securities in the stock market, it is a transaction.

➢  What is a Tax? 

Tax is a compulsory fee imposed on the citizens of a country by its government. The government mainly uses taxes to run the country. There are many forms of taxes, such as state taxes, central government taxes, direct taxes, indirect taxes, and much more. 

It has to be noted that STT is charged only on buying and selling of Equity securities which means stocks you own in a company, Equity Mutual Funds like SBI Small Cap Funds, Equity Shares (Tata Motors provides equity shares), and Equity Derivative which is when the price of the share depends on another asset.

This tax is not imposed on Debt Funds.

With the help of Securities Transaction Tax, the government can get a report of every transaction you have made in the market. The government can use reverse transactions to calculate your transaction amount. They can know about your profits and gains. Now, the government can use that knowledge to see if you are avoiding capital gains tax!

People avoided reporting their income, and hence, STT was introduced. STT is a mechanism through which the government keeps an eye on your capital gains income from your shares to under-report or avoid reporting your income.

Types of Securities

We know that STT is charged on all market transactions involving equity and equity derivatives. However, it is worth knowing the types of securities in the market. They are 

➢ Debt securities

➢ Equity securities

➢ Derivative securities

➢ Hybrid securities (combination of debt and equity)

Within “derivative securities,” we have Futures, Forwards, Options, and Swap.

➢ Future – 

Involves purchase and delivery of an asset at an agreed-upon price at a future date

➢ Forward – 

It is similar to futures, but it trades not in exchange, only in retailing.

➢ Options- 

 It is similar to futures, but the difference is that the buyer is under no obligation to buy or sell his stocks. 

➢ Swap –

It is the exchange of one kind of cash flow with another.

Securities Transaction Tax Calculation: 

We will now calculate the Securities Transaction Tax for Exchange Traded Funds, equity, and future & options. STT rate for different types of securities is different. In the case of intraday equity trading, it is 0.025%. For Futures and Options, it is 0.01% and 0.017%, respectively, and for exchange-traded funds, it is 0.10%.  

For Exchange Traded Funds (ETF):

When you buy and sell equity mutual funds or exchange-traded funds (ETF) through the stock exchange platform, you will be charged an STT of 0.10%, which is 10 Paise. 

Let’s say you invested INR 1,00,000 in an ETF after taking delivery (i.e., after you get the credit in the Demat account). Now, you decide to sell it. You are selling it at a value of INR 1,20,000.

Now, you’ll be charged 0.10% both on the buying and the selling side.  

Here, (*) means multiplication

Buying = 1,00,000 *0.10% = INR 100

Selling = 1,20,000* 0.10% = INR 120

Total STT Rate = Buying + Selling = 100+120 = INR 220

Therefore, STT Rate for the buying side will be 100 rupees, and for the selling side will be 120 rupees. The total STT for buying and selling is INR 220.

For Equity: 

Intraday trading is when you buy and sell STT on the same day. In Intraday trading, you are not charged on the buying side. The STT charge will be applied only on the selling side.

Let us assume that you are an investor in the equity segment of the stock market. You have decided to purchase 100 shares of Reliance company for INR 25 rupees per share. You then decide to sell them on the same day at INR 50 rupees. 

When you are buying and selling shares on the same day, it is called intraday trading. The current Securities Transaction Tax rate for intraday equity trading is 0.025%. To calculate the STT rate for intraday equity trading, we have to multiply the STT rate for intraday equity trading with the price at which those shares were sold and the number of shares sold. Here, (*) means multiplication.

STT (for intraday equity trading) = STT Rate * Selling Price * Shares.

From the above example, we can substitute the values,

STT = 0.025% (intraday STT tax rate) *50 (selling price of the shares) *100(number of shares)

STT = INR 12.5

For Futures and Options:

Let us now say that you have decided to buy futures and options securities of NIFTY Futures. You are buying five lots of NIFTY Futures at INR 3000 and sell at INR 3050. The size of a lot is 100 shares. The STT for futures is 0.01% and for Options is 0.017%. Here, (*) means multiplication.

STT (for futures) = STT Rate * Selling Price* lots * lot size

From the above example, we can substitute the values,

SST = 0.01% (Futures STT Rate) *3050 (Selling Price) *5 (lots)*100 (lot size sold) 

SST = INR 152.50

Securities Transaction Tax: Direct or Indirect?

There’s divided opinion on whether STT should be called a direct or indirect tax. Sometimes, it is classified under both. The reason some people consider it an indirect tax is that the broker is involved. The broker is collecting STT from clients.

However, though the broker collects the STT, we can still say it is a direct tax. Let us look at the definition of direct tax.

➢  Direct Tax: Direct tax is where liability cannot be shifted, and the person on whom liability falls must deposit it with the govt.

A customer cannot transfer the liability of Security Transaction Tax to the broker. It is imposed on the person who has invested or traded in the securities market, so we can say that STT is a direct tax.


Securities Transaction Tax was started to solve the problem of tax evasion in India. People were trying to evade taxes. These taxes were on the profits they earned on their capital gains through the share market platform. STT allows the government to know the transactions citizens are making. It has provided a clean and efficient system for collecting taxes.

FAQs about Securities Transaction Tax:

1. Is the Securities Transaction Tax different with different brokers?

No, Securities Transaction Tax is not different if you go to another broker. STT is imposed by the Central Government. Hence, they are the same everywhere.

2. Is Security Transaction Tax refundable?

No, Security Transaction Tax (STT) is not refundable.STT is applied to the value of your transaction. It is based on your capital gains profit.

3. Is the Securities Transaction Tax rate the same for different types of securities bought and sold in the market?

 Yes, the STT rate is different for different types of securities. The rate varies depending on the type of securities bought.

4. If there are other taxes, then why was STT introduced?

 STT is easier to implement as taxes here are collected through the stockbroker. It is a neat and efficient system.

Leave a Comment