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Securities Transaction Tax: Meaning, Features and STT on Mutual Fund

There are a host of factors to consider while choosing to make an investment in mutual funds. Depending on your risk appetite and financial goals, you can consider investing in debt mutual funds, equity mutual funds, or hybrid funds. Your selection criteria could depend upon the track record of the fund house, the expertise of the mutual fund manager, and an estimate of the returns that could be generated over a given time frame.

But besides return expectations, you will also have to consider potential tax liabilities. This is, of course, the capital gains tax that you will need to pay, depending upon the nature and duration of the scheme. But did you know there is another form of tax you must keep in mind? Yes, there is. It is called the securities transaction tax.

But what is securities transaction tax exactly? This article will seek to explain its concept, the securities that attract this tax, and whether it will affect your investment in mutual funds.

What is Securities Transaction Tax?

Securities Transaction Tax or STT is a tax applied on the buying and selling of securities irrespective of the profit or loss made by you in the transaction. This tax was introduced in 2004 to curb tax evasion, particularly of capital gains tax. It is a form of direct tax because it is levied directly on the value of the transaction. The government decides the securities transaction tax rate, which can be altered from time to time.

Features of Securities Transaction Tax

Some of the features of the securities transaction tax are as follows:

• A listed stock exchange or any prescribed person, such as mutual funds or lead merchant bankers, collects the tax from the investor and pays it to the government on or before the 7th of the following month.
• As far as derivatives are concerned (futures), STT is charged only on sell transactions, whereas in options, STT is charged on sale and purchase both transactions.
​ • Off-market transactions (i.e., securities not traded on stock exchanges except equity oriented mutual funds) do not attract securities transaction tax.

Securities on which STT is Applicable

The definition of ‘securities’ has not been precisely stated in the Securities Transaction Act. However, the act allows borrowing of the definition from the Securities Contracts (Regulation) Act, 1956. Thus, accordingly, STT is applicable on the following set of securities:

• Shares, stocks, scrips, bonds, debentures, or other similar securities belonging to an incorporated company or other body corporate
• Units or any other instruments issued by collective investment schemes
• Securitised debt instruments • Government securities of equity nature
• Equity-oriented mutual funds
• Rights or interest in securities
• Derivatives

STT on Mutual Fund

As far as mutual funds are concerned, STT is applicable only in respect of the sale of units of equity-oriented mutual funds on a recognised stock exchange and on the repurchase of the units of equity-oriented funds by the mutual fund. Equity funds are those mutual funds where the equity exposure exceeds 65%. These funds could be multi-cap, large-cap, mid-cap, small-cap, Equity Linked Saving Schemes (ELSS), and so on.

The rate of STT is 0.001% on the price at which the unit is sold, and the seller is responsible for the payment. Purchase, sale, and redemption of units of mutual funds other than equity-oriented funds do not attract securities transaction tax.

Thus, once you have sold any units of equity mutual funds, you will be liable to pay securities transaction tax irrespective of whether you have made any capital gains or not.

Additional Read: What is Exit Load​​?

When is Securities Transaction Tax Levied?

STT is levied whenever any of the above-mentioned securities are bought and sold. STT is likely to be applicable to the buyer and the seller depending upon the nature of the transaction, but it is the stock exchange or prescribed person who collects the tax on behalf of the buyer or seller and pays it to the government.

The following table sums up the securities transaction tax percentages and the person responsible for paying it:

Taxable transactions STT Rate STT paid by STT applicable on what value
Purchase of equity share (delivery based)0.1% Purchaser Price at which equity share is purchased
Sale of equity share (delivery based)0.1% Seller Price at which equity share is sold
Sale of a unit of delivery-based, equity-based mutual fund 0.001% Seller Price at which unit is sold
Sale of shares or units of an equity-based mutual fund (outside of delivery) 0.025% Seller Price at which share or unit is sold
Exchange Traded Funds (ETFs) – when equity-oriented funds are sold to mutual funds 0.001% Seller Price at which unit is sold
Purchase of units of equity-oriented mutual funds Nil Purchaser Not applicable

To conclude…

STT is an important source of revenue for the government, but it can also increase the transaction costs for investors. It can be relatively expensive for investors to trade or invest in the short term. How STT can impact investors will depend on the securities they choose to invest in and their overall investment strategy. As far as your investment in mutual funds is concerned, if you have invested in an equity-oriented mutual fund, then STT is applicable when you sell the units of the scheme. However, no STT will be levied if you have invested in a debt-oriented mutual fund scheme.

Additional Read: Who is Fund Manager​?

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Disclaimer:
Helpful information for investors: All Mutual Fund investors have to go through a one-time KYC (know your Customer) process. Investors should deal only with registered mutual funds, to be verified on SEBI website under 'Intermediaries/ Market Infrastructure Institutions'. For redressal of your complaints, you may please visit www.scores.gov.in . For more info on KYC, change in various details & redressal of complaints, visit mf.nipponindiaim.com/investoreducation/what-to-know-when-investing This is an investor education and awareness initiative by Nippon India Mutual Fund.

The information herein is meant only for general reading purposes and the views being expressed only constitute opinions and therefore cannot be considered as guidelines, recommendations or as a professional guide for the readers. The document has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. The sponsor, the Investment Manager, the Trustee or any of their directors, employees, associates or representatives (“entities & their associates”) do not assume any responsibility for, or warrant the accuracy, completeness, adequacy and reliability of such information. Recipients of this information are advised to rely on their own analysis, interpretations & investigations. Readers are also advised to seek independent professional advice in order to arrive at an informed investment decision. Entities & their associates including persons involved in the preparation or issuance of this material shall not be liable in any way for any direct, indirect, special, incidental, consequential, punitive or exemplary damages, including on account of lost profits arising from the information contained in this material. Recipient alone shall be fully responsible for any decision taken on the basis of this document. Language Disclaimer:
While utmost care has been taken in translating the article into respective regional language(s), in case of any confusion or difference of opinion, article available in English language should be deemed as final. The article provided herein is meant only for general reading purposes and the views being expressed only constitute opinions and therefore cannot be considered as guidelines, recommendations or as a professional advice for the readers. The document has been prepared on the basis of publicly available data/ information, internally developed data and other sources believed to be reliable. The sponsor, the Investment Manager, the Trustee or any of their directors, employees, associates or representatives (“entities & their associates”) do not assume any responsibility for, or warrant the accuracy, completeness, adequacy and reliability of such information. Recipients of this information are advised to rely on their own analysis, interpretations & investigations. Readers are also advised to seek independent professional advice in order to arrive at an informed investment decision. Entities & their associates including persons involved in the preparation or issuance of this material shall not be liable in any way for any direct, indirect, special, incidental, consequential, punitive or exemplary damages, including on account of loss of profits arising from the information contained in this material. Recipient alone shall be fully responsible for any decision taken on the basis of this article. "ABOVE ILLUSTRATIONS ARE ONLY FOR UNDERSTANDING, IT IS NOT DIRECTLY OR INDIRECTLY RELATED TO THE PERFORMANCE OF ANY SCHEME OF NIMF. THE VIEWS EXPRESSED HEREIN CONSTITUTE ONLY THE OPINIONS AND DO NOT CONSTITUTE ANY GUIDELINES OR RECOMMENDATION ON ANY COURSE OF ACTION TO BE FOLLOWED BY THE READER. THIS INFORMATION IS MEANT FOR GENERAL READING PURPOSES ONLY AND IS NOT MEANT TO SERVE AS A PROFESSIONAL GUIDE FOR THE READERS."

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