What is Securities Transaction Tax (STT)?

About Securities Transaction Tax (STT):

• What is it? It is a direct tax charged on the purchase and sale of securities listed on the recognized stock exchanges in India.
• It is levied and collected by the central government of India.
• STT is governed by Securities Transaction Tax Act (STT Act), and STT Act has specifically listed various taxable securities transactions, i.e., transactions on which STT is leviable.
• Taxable securities include equities, derivatives, or equity-oriented mutual funds investment units (excluding commodities and currency).
• The rate of taxation is different for different types of securities.
• STT is not applicable to off-market transactions or to commodity or currency transactions. 
• The liability of applying the STT is on the broker when the client undertakes transactions in the stock market. The collected amount is then paid to the government.
• The charges and rate of STT are reflected on the contract notes which a broker provides to its clients for every execution of trades. 

What is Futures and Options Trading?

• Futures and options are the major types of stock derivatives trading in a share market. 
• These are contracts signed by two parties for trading a stock asset at a predetermined price at a later date.
• It provides individuals to reduce future risk with their investment through pre-determined prices. 
• Future and options in the share market are contracts that derive their price from an underlying asset (known as underlying), such as shares, stock market indices, commodities, ETFs, and more
• Future v/s Option:
  • Future and option trading are different in terms of obligations imposed on individuals. 
  • While futures act as a liability on an investor, requiring them to follow up on a contract by a pre-set due date, an options contract gives an individual the right to do so (provides a buyer with a choice to do the same, if he/she profits from a trade.)

What are Derivatives?

• Derivatives are financial contracts set between two or more parties that derive their value from an underlying asset, group of assets, or benchmark.
• A derivative can trade on an exchange or over the counter.
• Prices for derivatives derive from fluctuations in the underlying asset.
• Common derivatives include futures contracts, forwards, options, and swaps.

 

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Q1) What are Financial Securities?

Securities are fungible and tradable financial instruments used to raise capital in public and private markets.There are primarily three types of securities: equity—which provides ownership rights to holders; debt—essentially loans repaid with periodic payments; and hybrids—which combine aspects of debt and equity.

Source: Finance Bill 2023. F&O trading: Securities Transaction Tax hiked by Government