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The profits you earn are slightly more than what settles in your bank account, owing to various charges. One such intimidating fee is the Securities Transaction Tax, or STT as you would see in your statements. So, what is STT? And how much STT is charged on your trades? In this blog, we will understand what STT is and how the securities transaction tax works.

What is STT?

STT, simply put, is a direct tax levied on the purchase and sale of securities traded on recognised stock exchanges in India. Introduced in 2004 to replace the Stamp Duty, it serves as a significant source of revenue for the government. Whether you're a seasoned investor or a curious beginner, understanding STT is crucial for calculating costs, maximising returns, and ensuring compliance.

How does STT work?

STT functions like a toll booth on the investment highway. Every time you buy or sell securities like stocks, mutual funds, or derivatives, you pay a specific percentage of the transaction value as STT. The applicable rate varies depending on the type of transaction. So, how much STT is charged on your trades? Here are the rates.

  • Intra-day trades (same-day purchase and sale):

    • Equity shares: 0.025% on the sale value
    • Derivatives (including futures and options): 0.0125% on the sell value

  • Delivery-based trades (purchase held overnight or longer):

    • Equity shares: 0.1% on both buy and sell values
    • Equity-oriented mutual funds: 0.1% on buy value
    • Derivatives: 0.1% on the sell value

Important considerations for STT

  • STT is not the same as brokerage charges, which are fees levied by your broker for facilitating the transaction.
  • STT is automatically deducted by your broker along with other charges and reflected in your contract note.
  • You cannot claim a refund on STT once paid.
  • STT applies to both profits and losses.

Impact of STT on your investments

While STT isn't a major expense compared to potential investment gains, understanding its impact is crucial for informed decision-making:

  • Short-term trading: High STT rates on intra-day trades can significantly impact your returns, especially for small profits. Consider holding positions longer to minimise STT impact.
  • Mutual fund investments: STT only applies to equity-oriented mutual funds, not debt-based ones. Diversifying your portfolio can help mitigate STT impact.
  • Long-term investing: STT becomes less significant over time as long-term gains tend to outweigh the initial cost. Focusing on long-term wealth creation strategies can help minimise its impact.

Beyond the basics

In addition to the basics of the securities transaction tax, understanding the impact on capital gains, its implications on different account types, and the applicable exemptions is a cherry on top. 

  • STT exemptions: Certain transactions, like buying government bonds or units of specific infrastructure funds, are exempt from STT. Explore these exemptions to optimise your investment strategy.
  • Impact on capital gains tax: STT is not deductible from your capital gains tax calculation. Keep separate records to avoid confusion.
  • STT implications for different account types: STT rules might differ slightly for Non-Resident Indians (NRIs) and other account types. Consult your advisor for specific details.

Conclusion

Understanding STT empowers you to make informed investment decisions, manage costs effectively, and comply with regulations. Remember, STT is just one aspect of the investment landscape. Consider factors like risk tolerance, investment goals, and market trends to make wise choices. Most importantly, invest with a long-term perspective, and STT's impact will diminish as your wealth grows.

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