1. What is Securities Transaction Tax?
Securities Transaction Tax (STT) is a tax levied on transactions done on a recognised stock exchange in India. It is not an income tax -- it is a transaction tax collected by the exchange from the buyer and/or seller. STT was introduced in 2004 when the government removed the 10% long-term capital gains tax on equity. The logic: tax the transaction rather than the gain. When LTCG on equity was reintroduced in 2018 (and subsequently modified in 2024), STT was retained alongside it.
2. STT Rates: Budget 2024 Changes
| Transaction Type | STT Rate | Payable By |
|---|---|---|
| Delivery-based equity purchase | 0.1% | Buyer |
| Delivery-based equity sale | 0.1% | Seller |
| Intraday equity sale (no delivery) | 0.025% | Seller only |
| Futures sale | 0.02% (Budget 2024: increased from 0.01%) | Seller |
| Options sale (premium) | 0.1% (Budget 2024: increased from 0.05%) | Seller |
| Options exercise | 0.125% | Buyer |
| Equity mutual fund units | 0.001% (on sale) | Seller |
3. Why STT Matters for Capital Gains Tax
STT is the gateway to the concessional capital gains tax rates on listed equity. Under ITA 2025:
- LTCG on listed equity at 12.5% (Section 112A): applicable ONLY if STT was paid on both acquisition and sale of equity shares
- STCG on listed equity at 20% (Section 111A): applicable ONLY if STT was paid on sale
- Without STT: LTCG taxed at 20% (Section 112) and STCG at slab rate
- For equity mutual funds: STT is embedded in the fund NAV -- investors do not pay separately but the fund pays STT on redemption, qualifying the investor for Section 112A/111A rates
4. STT and Business Income
For traders who declare share trading income as business income (not capital gains), STT treatment differs:
- STT paid by a trader is a deductible business expense under Section 37 of ITA 2025
- For F&O traders, STT on all futures and options transactions is deductible
- For equity intraday traders, STT on intraday equity is deductible
- For investors (capital gains treatment), STT is NOT deductible separately -- it is a cost of acquisition or disposal which may reduce the gain marginally
5. STT Exemption for Acquisition: When Not Required
The requirement that STT be paid on acquisition is waived in certain cases for the LTCG concessional rate to apply:
- Shares acquired before STT was introduced (before 1 October 2004)
- Shares acquired through off-market transfer in certain specified cases (IPO allotment, rights issue, bonus shares, ESOP allotment)
- Shares acquired through inheritance
- In these cases, even without STT on acquisition, the sale-side STT is sufficient to qualify for the concessional 12.5% LTCG rate
6. STT on Debt Mutual Funds and ETFs
STT on mutual fund units:
- Equity mutual funds and equity ETFs: 0.001% STT on redemption at the fund level
- Debt mutual funds: generally no STT (hence not qualifying for equity concessional rates -- and debt funds are now taxed at slab rate anyway from April 2023)
- Gold ETFs: no STT -- hence LTCG on gold ETF is at slab rate, not 12.5%
- International Fund of Funds: no STT -- hence slab rate on gains
7. Arbitrage Funds: STT and Low Tax
Arbitrage funds (hedged equity funds) maintain 65%+ in arbitrage positions (cash market buy + futures sell, or vice versa). Since transactions go through the stock exchange, STT is paid. This qualifies arbitrage funds for equity LTCG/STCG treatment:
- LTCG (held 12+ months): 12.5%
- STCG (held less than 12 months): 20%
- Arbitrage fund returns typically resemble liquid fund returns (6-7.5%) but are taxed at far lower rates than debt funds (slab rate), making them attractive for high-bracket investors for short-term parking of funds
8. STT in ITR: No Separate Reporting
STT is not separately reported in the ITR. For investors:
- Capital gains from equity (Section 112A/111A) are entered in Schedule CG -- the concessional rate applies automatically
- The broker capital gains statement confirms STT was paid on transactions
- For traders: STT is included in the P&L statement as a business expense and auto-reduces profit
9. F&O Turnover and STT
For F&O traders, the STT rate increases from Budget 2024 are significant:
- Futures STT: increased from 0.01% to 0.02% on sale side (doubled)
- Options STT on premium: increased from 0.05% to 0.1% on sale side (doubled)
- For a trader doing Rs 1 crore in futures notional turnover: STT cost increased from Rs 10,000 to Rs 20,000 annually
- For options traders with Rs 10 lakh in premium turnover: STT from Rs 500 to Rs 1,000 -- significant proportional increase
10. Why TaxClue
STT affects both the tax rate applicable to your gains and the deductibility of trading costs. Understanding STT interaction with ITA 2025 capital gains provisions is essential for investors and traders. TaxClue advises on STT implications and files accurate capital gains ITR. Contact us under ITA 2025.