Evading tax payment is a deep-rooted affliction among many taxpayers. Trying to dodge paying tax on capital gains by not disclosing profits from the sale of securities is an unethical and unlawful activity. Not only does this translate into the taxpayers evading their duty as citizens, but it also leads to a significant decline in the Government’s coffers used for public welfare schemes.
Keeping this in mind, the Indian Government introduced measures to keep such unfair practices in check, one of them being the Securities Transaction Tax. Since its introduction in October 2004, investors have been bound by the law to pay taxes on their capital gains made in the financial markets.
Here is a detailed explanation of the features, scope, and rates of the Securities Transaction Tax in India.
What is Securities Transaction Tax in India?
The Securities Transaction Tax (STT) is the charge on the transaction of securities made on the domestic stock exchanges of India. Securities refer to tradeable investment instruments like shares, debentures, bonds, equity-oriented mutual funds, etc., issued either by companies or the Government. The primary aim of introducing STT was to curb the tendency of investors to avoid paying appropriate taxes on capital gains.
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Features of Securities Transaction Tax
Following are some of the features that define the Securities Transaction Tax:
- It is a direct tax that the Central Government levies and collects.
- Off-market share transactions do not fall under the ambit of STT.
- The rate of STT depends on the type of security being traded and whether the transaction is a sale or purchase.
- Sell transactions for both options and futures fall under the scope of the tax regime. Options are valued at a premium and futures are valued at the actual traded price.
- Clearing members pay an STT, which is a collective sum of the STTs of trading members’ under them.
Scope of Securities Transaction Tax
The Securities Transaction Tax applies to the various types of transactions made on the recognised Stock Exchanges of India. As per the Securities Contract Act (1956), the following transactions fall under the purview of ‘securities’:
- Shares, stocks, scrips, bonds, debentures, or any such marketable security traded in the stock market
- Units or other instruments that any collective investment scheme issues to customers
- Derivatives
- Government securities of the nature of equities
- Equity-trading-based mutual funds
- Securitised debt instruments
- Rights or interests in securities
Securities Transaction Tax rates in India
The rate applicable for the Security Transaction Tax depends on the type of security and the nature of the transaction. Below is a list of the different STT rates and the securities on which they are applicable.
Now that you are aware of how the STT is levied, let us see its implication with regard to the Income Tax.
Securities Transaction Tax and Income Tax
A person can trade in securities either for investment or business purposes. In both cases, the Government levies STT. Moreover, the tax applicable on share market trading depends on the purpose or nature of the transaction, as described earlier.
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The income from share market trading also attracts Income Tax. It is of the following two types:
1. Income from professional trading in stocks
This is when you engage in buying and selling stocks as a part of your profession. In such a scenario, the returns and losses from share trading classify as business income. Thus, the Government-specified regular income tax rates will be chargeable on the income under the heading of profits or gains from business or profession. On this, you can claim the STT paid on such income as deduction according to Section 36 of the Income Tax Act.
2. Income from capital gains
If you trade securities solely for investment purposes, the returns classify as capital gains. Depending on the holding period of the investment, the profits can be short-term or long-term. A holding period of less than a year comes under short-term capital gains. On the contrary, long-term capital gains are applicable if you hold stocks for more than a year. You are obligated to pay Income Tax on any such capital gain.
The takeaway
The Central Government imposes Securities Transaction Tax on every sale and purchase of securities listed on the recognised domestic stock exchanges. It is an effective tool of the Government that ensures timely and efficient tax collection on transactions in the financial markets. Further, STT ensures a reduction in the inflow of speculative cash in the market and curbs tax evasion. All stock market transactions involving equity or equity derivatives like options and futures fall within the scope of STT.
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