SC to hear Securities Transaction Tax plea: What STT is and why it matters to stock market investors

The Supreme Court has agreed to review a petition challenging the constitutionality of the Securities Transaction Tax (STT). On Monday, a bench led by Justice J.B. Pardiwala issued a notice to the Union government, specifically the Ministry of Finance, seeking a formal response to the plea,_ The Hindu_ reported..

Filed by Aseem Juneja and represented by advocate Siddhartha K. Garg, the petition argues the STT violates fundamental rights, including the rights to equality and freedom of trade.

What is Securities Transaction Tax (STT)?

STT is charged on the purchase and sale of securities like stocks, derivatives, and equity mutual funds traded on an exchange. Because it's an extra cost on top of the trade price, it increases the total transaction value. It also applies to unlisted shares that are later listed through an IPO.

For delivery-based trades in equity shares (where the shares are held for more than a day), a rate of 0.1% is levied on the transaction value. Specifically, the purchaser pays this 0.1% on the price of the shares bought, and the seller pays 0.1% on the price of the shares sold.

Similarly, the sale of units of an equity-oriented mutual fund or an Exchange-Traded Fund (ETF) attracts a very low rate of 0.001%, which is also paid only by the seller on the price of the unit

Individuals who earn profit from LTCG or STCG cannot claim STT as an expense.

Under Section 112A of the Income Tax Act, Long-Term Capital Gains (LTCG) from the sale of shares (on or after July 23, 2024) are generally taxed at a special rate of 12.5% after allowing an initial exemption of ₹1.25 lakh.

However, to qualify for this special rate and exemption, Securities Transaction Tax (STT) must be mandatorily paid at the time of both acquiring and transferring the equity shares.

The Securities Transaction Tax (STT) was introduced in 2004 through the Finance Act to make tax collection from stock market transactions more efficient and to prevent people from evading capital gains tax.