Securities Transaction Tax (STT) was introduced in India a few years ago, to circumvent the tax avoidance of capital gains tax.
The government can only tax those profits, which have been declared by people. A lot of people simply didn’t declare their profits and avoided paying any capital gains tax.
To circumvent this situation, the Finance Minister at that time Mr. P Chidambaram introduced the Securities Transaction Tax. This tax is payable whether you buy or sell a share and gets added to the price during the transaction itself.
Since brokers have to automatically add this tax to the transaction price, there is no way to avoid it. If you place a limit order, then the broker will automatically adjust their brokerage and the Securities Transaction Tax and give you a price that matches your price. So, in a lot of cases; you will not even notice the tax that you paid. The flip side is that you end up paying this tax even if you have not made any gains at all.
What is Securities Transaction Tax rate?
In case of buying or selling stocks or equity oriented mutual funds, the STT is 0.125% of the total transaction value. This is what most people end up paying and this rate applies for stocks that you will take delivery of.
In case of squaring off daily positions or not taking delivery, the STT is 0.025%.
In case of derivatives, the tax is only on the seller and is calculated at 0.017%.
At the end of the year, you can ask your broker to give you a certificate of the STT that you have paid through the year. You can use this amount to deduct from your short term capital gains and get a tax credit.