Securities Transaction Tax
Securities Transaction Tax (STT) is a transaction-level tax levied at source on the purchase or sale of equity shares, equity mutual fund units, derivatives, and other specified securities traded on recognised Indian stock exchanges, with rates varying by instrument type and whether the transaction is delivery-based or otherwise.
STT was introduced through the Finance (No. 2) Act, 2004, effective from 1 October 2004, as part of a broader package that simultaneously withdrew the long-term capital gains (LTCG) exemption under Section 10(38) for listed equity. The underlying policy premise was to replace a tax that was difficult to administer (LTCG) with one that was deducted at the point of transaction by the stock exchange or mutual fund house, making evasion structurally impossible.
The STT rate structure distinguishes between several transaction types. For delivery-based equity trades — where shares are taken or given into the demat account — both the buyer and seller were each charged 0.1% of the transaction value as of the Finance Act 2023. For intraday equity trades settled without delivery, only the seller was charged at 0.025%. For equity futures, the seller was taxed at 0.0125%, while for equity options the levy was 0.0625% on the option premium paid by the buyer (on exercise or expiry, a separate rate applied). Equity mutual fund units redeemed directly with the AMC attracted STT of 0.001% payable by the seller. These rates were revised in the Union Budget 2024, with futures STT raised to 0.02% and options STT to 0.1% of the option premium, substantially increasing transaction costs for F&O participants.
STT is not deductible as a business expense for income tax purposes when the taxpayer is classified as an investor (capital gains route). However, SEBI-registered traders treating F&O income as business income under Section 43(5) can claim STT as a deduction under Section 37(1). This asymmetric treatment has been a long-standing grievance of active traders who bear STT costs without the corresponding tax relief available to businesses on other expenses.
For the government, STT represents a high-efficiency revenue source. STT collections grew significantly with the surge in retail participation and F&O volumes: collections crossed Rs 35,000 crore in FY2023-24, up from roughly Rs 20,000 crore in FY2022-23, reflecting the explosive growth in index and stock options turnover. The Budget 2024 hike in F&O STT rates was partly a revenue measure and partly a signal about concerns over excessive retail speculation in derivatives.
STT also has capital gains tax implications. Section 111A (short-term capital gains on listed equities) and Section 112A (long-term capital gains on listed equities introduced from Budget 2018) both require that STT should have been paid on the acquisition or sale of the relevant security to qualify for the concessional tax rates. Transactions in unlisted securities or those structured to avoid STT do not qualify for these concessional provisions, incentivising exchange-based trading for tax efficiency.