Explained: How securities transaction tax impacts your investments

Securities transaction tax (STT) is levied by the central government on stocks, stock derivatives and equity mutual funds, as a proportion of the traded value. Though the quantum of the tax is small, it leads to higher transaction costs and eats into the profits of investors. It is a tax levied on buying and selling transactions carried out in the stock exchanges. This tax was introduced in the Finance Bill of 2004. The government abolished long-term capital gains tax on stocks and equity mutual funds and introduced STT. The idea was to collect a small amount on market transactions. Later, though long-term capital gains tax was reintroduced, the government opted to continue with the STT as some investors did not pay taxes on capital gains. This tax is charged on stocks, derivatives and equity mutual funds. As the rate is very low, most investors do not feel the pinch. Since the STT is collected by the broker or mutual funds and paid to the government, there is zero leakage and there is not much of a cost associated with the collection of tax.

What is the rate of STT charged?

STT is chargeable on delivery based buying and selling of equity shares, derivative transactions and sale of equity mutual funds. The rates are as follows.