Capital Market Tax Changes: Understanding Securities Transaction Tax (STT)

Why in News ?

The Finance Minister has proposed a sharp increase—by up to 150%—in the Securities Transaction Tax (STT) on both futures and options (F&O) trading. This move is aimed at curbing excessive speculation, improving market stability, and boosting government revenues from capital market activity.

What is Securities Transaction Tax (STT) ?

Securities Transaction Tax (STT) is a direct tax levied on the purchase and sale of securities that are traded on recognised stock exchanges in India.

• It is levied and collected by the Central Government.
• STT is imposed irrespective of whether the transaction results in profit or loss.
• It is charged on the value of the transaction, not on capital gains.
• STT operates similarly to Tax Deducted at Source (TDS), as it is deducted at the time of the transaction itself.
• The tax is remitted to the government through stock exchanges and intermediaries.

Legal Framework and Coverage

• STT was introduced through the Finance Act, 2004 to simplify securities taxation and curb tax evasion.
• It is governed by the Securities Transaction Tax Act (STT Act).
• The Act specifies the exact transactions on which STT is leviable.

Taxable Securities Include:

• Equities traded on stock exchanges,
• Derivatives (futures and options),
• Units of equity-oriented mutual funds,
• Unlisted shares sold under an Offer for Sale (OFS) in an IPO and subsequently listed.

STT is NOT Applicable To:

• Off-market transactions,
• Commodity derivatives,
• Currency derivatives.

STT Rates and Government Authority

• The rate of STT varies depending on:
  • Type of security,
  • Nature of transaction (delivery vs non-delivery),
  • Whether it is a purchase or sale.
• The Central Government has the authority to revise STT rates periodically, as proposed in the latest Budget for futures and options.

Why Increase STT on Futures and Options ?

• F&O trading volumes in India have surged, driven largely by retail participation.
• Excessive speculative activity can:
  • Increase market volatility,
  • Heighten systemic risk,
  • Divert household savings away from productive investments.
• Raising STT:
  • Increases the transaction cost, discouraging excessive churning.
  • Enhances tax compliance and revenue.
  • Signals regulatory intent to moderate speculative trading without imposing outright restrictions.

What are Futures and Options (F&O) ?

Futures and options are types of derivative contracts, whose value is derived from an underlying asset such as:

• Shares,
• Stock indices,
• Exchange-traded funds (ETFs),
• Commodities, or other financial instruments.

Key Features of Derivatives:

• Used for hedging risk, speculation, and portfolio diversification.
• Contracts are entered into at a pre-determined price for execution at a future date.

Difference Between Futures and Options:

Implications of Higher STT on F&O Markets

• Retail traders may face higher costs, discouraging frequent short-term trades.
• Market liquidity may reduce marginally, but speculative excess could decline.
• Could encourage a shift towards long-term investing rather than leveraged trading.
• Enhances the government’s ability to regulate financial markets through fiscal tools, complementing regulatory measures by SEBI.