How does security transaction tax apply to you?

The Securities Transaction Tax (STT) was introduced by Chapter VII of the Finance Act (No.2) Act, 2004. STT is a tax being levied on all transactions done on the stock exchanges. Securities Transaction Tax is applicable on purchase or sale of equity shares, derivatives, equity oriented funds and equity oriented mutual funds.

When the Ministry of Finance announced its Annual Budget for the year 2004-2005, it also announced a new tax which would be levied on capital gains on financial securities – Security Transaction Tax (STT).

What is the Security Transaction Tax?

The Securities Transaction Tax (STT) was introduced by Chapter VII of the Finance Act (No.2) Act, 2004. STT is a tax being levied on all transactions done on the stock exchanges. Securities Transaction Tax is applicable on purchase or sale of equity shares, derivatives, equity oriented funds and equity oriented mutual funds.

How is STT applied?

STT is applied as following (effective from June 1^st, 2005):

• For transactions in a recognised stock exchange in India:
  • Purchase/Sale of equity shares, units of equity oriented mutual fund (delivery based) – 0.10%
  • Sale of equity shares, units of equity oriented mutual fund (non-delivery based) – 0.02%
  • Sale of derivative – 0.01%
• Sale of unit of an equity oriented fund to the mutual fund – 0.2%

What items fall under the category of ‘securities’?

‘Securities’ are defined under Section 2(h) of the Securities Contracts (Regulation) Act, 1956 (SCRA) to include:

• Shares, scrips, stocks, 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
• Such other instruments as declared by the Central Government; and
• Rights or interest in securities
• Equity-oriented mutual funds (not debt-oriented mutual funds)

STT is not applicable in case of government securities, bonds, debentures and units of mutual fund other than equity oriented mutual fund.

What are the tax exemptions in regards to short term and long term capital gains?

Long Term capital gains:

• For sale of equity shares, units of equity oriented mutual fund (delivery based), the gains are exempt from tax under section 10(38)
• For sale of unit of an equity oriented fund to the mutual fund, the gains are exempt from tax under section 10(38)

Short Term capital gains:

• For sale of equity shares, units of equity oriented mutual fund (delivery based), the gains are taxable at the rate of 10% (+surchage +education cess) under section 111A
• For sale of unit of an equity oriented fund to the mutual fund, the gains are taxable at the rate of 10% (+surchage +education cess) under section 111A

Sales of equity shares, units of equity oriented mutual fund (non-delivery based) and Sales of derivatives are both treated as business income. If income is shown as business income, one can claim tax rebate under section 88E.