Explained: What is securities transaction tax and why is it levied?

Securities transaction tax (STT) is a tax levied at the time of purchase and sale of securities listed on stock exchanges in India.

Securities are tradable investment instruments such as shares, bonds, debentures, equity-oriented mutual funds (MFs) and so on and are issued either by companies or by the Indian government.

This tax was introduced in the 2004 Union Budget and came into effect from 1 October 2004.

The rate of STT differs based on the type of security traded and whether the transaction is a purchase or a sale.

For instance, while buying or selling an equity share (delivery-based), purchaser and seller both need to pay 0.1% of share value as STT.

Similarly, while buying unit of an equity-oriented mutual fund, buyer need not to pay any STT; however, while selling units of an equity oriented mutual fund, she will need to pay STT at the rate of 0.001% of the unit value. These rates are decided by the central government.

The initiative behind introducing STT was to curb evading of capital gains tax on profits earned by transecting in securities.