Though the quantum of the tax is small, it leads to higher transaction costs and eats into the profits of investors

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.

STT is payable when you sell units of equity mutual funds. STT is not applicable at the time of purchase of equity mutual funds. Also, it is applicable to only equity-oriented mutual fund investors. Bond and gold funds, and fund of funds investors are exempted from paying STT. An equity-oriented fund invests at least 65 per cent of its assets in stocks and related instruments.

What about hybrid funds?

That depends on how your fund has managed its investments across equities and debt throughout the past year. At the time of redemption, if your fund has deducted STT, then it’s clear that your fund has invested at least 65 percent in equities in the preceding 12 months before you redeemed. If the fund house does not deduct STT, then the investor comes to know that at the time of exit, the scheme was a bond fund.

That’s also a cue for you to ascertain whether the fund qualifies to be an equity or a debt scheme (as far as taxation goes) and pay your capital gains tax accordingly.