Securities Transaction Tax (STT) is a tax levied on the transaction value of stocks, derivatives and mutual funds when you transact in these instruments. It only applies to transactions made through a stock exchange or directly with an AMC (fund house), in case of mutual funds. It does not cover private, off-market transactions. With regard to mutual funds, STT is levied only on the sale of equity and balanced funds. It is not levied on debt funds. STT is levied on direct and regular plans of mutual funds. No STT is levied on mutual fund NFOs (New Fund Offers).
STT was introduced in 2004 along with abolition of long term capital gains tax (LTCG) on stocks and equity mutual funds. LTCG was reintroduced by the 2018 Budget, but STT has still been retained.
How is STT deducted
STT is imposed on the redemption of mutual funds by you. It is imposed on transactions directly with an AMC or through a stock exchange. However the latter route faces a lower rate of STT.
|Sale of MF units with AMC||0.0010%|
|Sale of MF units on stock exchange||0.0010%|
|Non-delivery based MF sales||0.025%|
For example, let’s assume that you invested Rs 1 lakh in an equity fund. The fund’s NAV grew and your investment became Rs 1.5 lakh in value. At this point, you decided to redeem your MF units. At the time of redemption, the concerned AMC will deduct Rs 0.0010% or just Rs 1.5 towards STT. A higher rate of 0.025% applies to non-delivery based mutual fund sales such as intra-day sales. These types of transactions which involve a purchase and sale in such a short span of time that you do not actually take delivery of the mutual fund units. They are rarely done by retail investors.
Does STT affect your capital gains tax liability?
No. STT cannot be claimed as part of your cost of acquisition and it will not reduce your capital gains tax liability. The LTCG on equity mutual funds is 10% and the STCG (Short Term Capital Gains Tax) is 15%. However it can be claimed as a business expense by persons who trade in shares/mutual funds (professional traders).
You can read about capital gains tax on mutual funds here.