What is STT? The Tax Every Stock Market Investor Should Know About

If you are trading in the Indian stock markets—whether buying shares for long-term investment or speculating through derivatives—you have probably come across a line in your contract note or broker statement called ‘STT.’ But what is STT, and why should every stock market investor care about it? Let’s break it down in simple terms.

What is STT in the stock market?

Security Transaction Tax (STT) is a tax levied by the Government of India on purchasing or selling securities listed on recognised stock exchanges. It applies to equity shares, derivatives, equity-oriented mutual funds, and similar instruments. STT is charged at the transaction time, collected by the exchange, and then remitted to the government. The tax rates vary depending on the type of security and transaction, whether it is a purchase or sale. STT ensures transparency in securities trading and helps in tax compliance by capturing revenue directly from financial market activities without manual filing requirements.

List of securities where Securities Transaction Tax applies

The Securities Transaction Tax (STT) Act does not mention a specific description of the term ‘securities’. However, it permits the use of definitions from other acts. In this context, the meaning of ‘securities’ is drawn from the Securities Contracts (Regulation) Act, 1956, where it is clearly defined and includes:

• Listed equity shares traded on recognised stock exchanges
• Futures and options contracts traded in the market
• Units of equity-oriented mutual funds
• Government securities
• Rights or interests in securities
• Units issued by collective investment schemes
• Unlisted shares available under an offer for sale to the public and subsequently listed on stock exchanges

Who pays Securities Transaction Tax?

Anyone who transacts in listed securities on a recognised Indian stock exchange has to pay STT. This includes:

• Retail investors
• Day traders
• High-Frequency Traders (HFTs)
• Institutional investors
• Mutual funds
• Portfolio managers

Securities Transaction Tax on equity shares

STT on equity shares in India is 0.1% on the purchase and 0.1% on the sale of listed equity shares when settled by actual delivery or transfer. Unlisted shares are exempt from STT. However, capital gains tax applies according to the holding period. Short-term capital gains (holding period less than 12 months) on listed shares are taxed at 20%, while long-term capital gains (holding period over 12 months) are taxed at 12.5% beyond ₹1.25 lakh.

Securities Transaction Tax on mutual funds

STT is levied on the sale of units of equity-oriented mutual funds on a recognised stock exchange and the repurchase of such units by the mutual fund. The current STT rate for selling equity mutual funds is 0.001% for close-ended and ETFs, 0.025% for open-ended funds, and 0.025% for intraday (non-delivery) transactions. STT is collected by the fund house or stock exchange and remitted to the government by the 7th of the following month. It is a direct tax applied irrespective of profit or loss. STT cannot be claimed as part of the acquisition cost for capital gains tax, but can be deducted as a business expense by professional traders.

Securities Transaction Tax on the physical delivery of derivatives

STT on physically delivered derivatives is levied at 0.10% of the settlement price, payable by the purchaser. The Central Board of Direct Taxes (CBDT) has clarified that such contracts are treated like equity transactions settled by actual delivery.

Accordingly, the same STT rate applies. The National Stock Exchange (NSE) mandates STT collection on these transactions. The tax is calculated on the settlement price and collected from trading members at the end of each trading day.

Tips to minimise Securities Transaction Tax impact

• Hold investments long-term

Investing in equities for more than a year shifts gains from short-term to long-term, reducing tax rates. Long-term capital gains (LTCG) above ₹1.25 lakh are taxed at 12.5%, while short-term capital gains (STCG) are taxed at 20%.

• Tax-saving investments

Investing in Equity Linked Savings Schemes (ELSS) allows deductions under Section 80C, reducing taxable income.

• Opt for SIPs

Systematic Investment Plans (SIPs) in mutual funds help spread investments over time, reducing tax burden compared to lump-sum investments.

• Avoid frequent trading

Frequent buying and selling increase STT costs and attract higher short-term capital gains tax. Holding investments longer minimises tax impact.

• Portfolio structuring

Diversifying investments across tax-efficient instruments like the Public Provident Fund (PPF) and the National Pension System (NPS) can help reduce overall tax liability.

Conclusion

Securities Transaction Tax may seem like a small deduction, but it adds up over hundreds or thousands of trades. Understanding how STT works is essential for every market participant, from a casual investor to an aggressive day trader.

By recognising how it affects different segments like delivery, intraday, futures, and options, you can make profitable decisions in the stock market by integrating STT into your trade planning and tax filing strategy.