Securities Transaction Tax (STT) – Meaning, Applicability, Levy and Collection, Income Tax Implications
Security Transaction Tax was first introduced in the Union Budget 2004 which was presented by P Chidambaram. It came into effect from 1st of October, 2004.
The reason behind the introduction of Security Transaction Tax was that many people did not report the transactions of buying and selling securities in their income tax returns. Because of which the government had to lose a lot of tax.
Due to the introduction of STT, all the transactions of securities started being monitored by the government. This has made it possible to prevent tax evasion.
In this article, we will discuss about what a securities transaction tax is and what its provisions are, rates, penalty, and income tax implications –
What is Securities Transaction Tax or STT?
Securities Transaction Tax is levied on the buying and selling of securities. It is also called STT in short. However, it will be imposed only when the securities are being bought or sold on a stock exchange. It will not be levied on securities purchased or sold in the open market. Also, it is not imposed on commodities or currency.
Securities transaction tax is levied on the value of any security. That is, the price at which security is bought and sold.
The provision of securities transaction tax is also similar to TDS. STT is imposed as soon as a transaction of securities takes place.
STT is levied on which securities?
The Securities Contract (Regulation) Act, 1956 describes the securities on which securities transaction tax will be levied. If these securities are traded on the stock exchange, then STT will be levied on them.
According to this act, STT will be imposed on–
- Shares, Bonds, Debentures, Debentures Stocks or other similar marketable securities,
- Equity oriented Mutual Fund Units,
- Units of Business Trust,
- Unlisted Shares sold to Public in Initial Public Offer (IPO),
- Section 2(zg) of the Defined Security Receipt of Securitisation & Reconstruction of Financial Assets & Enforcement of Security Interest Act 2002
Note – STT is not levied on private or off-market transactions and debt or debt oriented funds as well as New Fund Offers (NPO).
Who collects and recovers STT?
It is the responsibility to collect STT of that stock exchange on which the securities are bought and sold. If the stock exchange does not collect STT on any transaction, then interest and penalty will be imposed on it.
Similarly, there is a responsibility to impose STT of a mutual fund on selling mutual fund units. And in Initial Public Offer (IPO), this responsibility is of the lead merchant banker.
Like TDS, it has to be deposited to the government after deducting securities transaction tax. After the month in which the collection of STT was done, it has to be deposited by the 7th of the following month. Otherwise both interest and penalty will be imposed.
After collecting the securities transaction tax, the stock exchange or mutual fund also has to file returns. STT returns are –
- Form No. 1 in case of Stock Exchange
- Form no. 2 in case of Mutual Fund
At what rate will the STT be levied?
The rates at which STT levied are determined by the central government and these STT rates depend on the type of securities and the type of transaction (buy or sell). These rates are also changed from time to time by the Central Government.
STT is levied on various securities at different rates as given below-
Interest and Penalty
If securities transaction tax is collected and is not deposited to the government by the stock exchange or mutual fund, then simple interest will be levied at the rate of 1%.
Penalty – This will be levied in addition to tax and interest –
|If STT is not collected by the Stock Exchange or Mutual Fund
|100% of STT not collected
|If it is not submitted to the government on time after collecting STT
|₹1,000 per day, until deposited
|Returns are not submitted by stock exchange or mutual fund
|₹100 per day, until returns are submitted
|Stock exchanges or mutual funds do not respond to notices
|₹10,000 per day
Income Tax and Security Transaction Tax
Securities transaction tax is levied on whatever securities are traded on the stock exchange. Transactions of securities are reported in income tax returns, so that these transactions can be taxed.
But, the biggest question comes whether the same transaction will be taxed twice?
So the answer will be no, because the STT that is imposed on the transaction of securities is exempted in the Income Tax Act, 1961.
To understand how to get STT exemption in income tax, first you need to know whether you are reporting the income of securities in the capital gains head or in the business or profession head.
Let’s know –
Reporting the Income on Securities under Capital Gains Head
If there is a profit from selling securities, it is separated into long term or short term. Short term capital gains will be taxed at the rate of 15%.
But, if there is long term capital gain, then tax will be levied only if it is more than ₹1 lakh. If long term capital gain is more than ₹1 lakh, tax will be levied at the rate of 10% and if less than ₹1 lakh, no tax will be levied.
No exemption is given for showing income of STT in the capital gains head.
Reporting the Income on Securities under Business or Profession Head
If the income on trading of securities is being reported in the business or profession head, then it can be exempted as business expenses in Section 36 of Income Tax Act 1961.
In this article, we covered various items related to Securities Transaction Tax or STT such as meaning of securities transaction tax, securities on with this tax is levied, various rates, penalties, income tax implications etc. If you liked this article, then share it further.