What is Securities Transaction Tax (STT)?

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Overview:

The government recently hiked the securities transaction tax (STT) by 23.52 percent on the sale of options and 25 percent on the sale of futures contracts.

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.

 


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