What is securities transaction tax and how it is driving investors to trade in options?

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Securities transaction tax is a kind of tax which is applied on the gains from the securities. The rate of STT vary with the type of security. In other words, Securities transaction tax is a type of tax which is levied on the transactions done in the domestic stock exchange. Securities transaction tax is a direct tax and is levied and collected by the central government of India.

The STT includes chiefly the equities and the F&O’s or the futures and options. The key feature of the securities transaction tax is that it is applicable only on the share transactions made through a recognized stock exchange in the country as the share market news confirms. In case you make an off-market share transaction, STT will not be levied.

Securities transaction tax or STT was formulated in the year 2004. The Finance Minister in 2004, Mr. P. Chidambaram had introduced STT. This tax was started as a move to avoid tax evasion in the case of capital gains. In the year 2013, the ministry was asked to lower the rate of taxation for STT after a huge revolt by the brokers and trader’s community.

Securities transaction tax, as the nomenclature says, is levied on the value of securities that does not include the commodities and currency.

Features of Securities Transaction Tax:

Some key features of STT are narrated below:

  • STT is a simple and direct tax
  • It is not complicated to calculate STT and levy the same
  • STT is levied on all sell transactions including the options as well as futures
  • To calculate Securities transaction tax, every future trade is valued at the actual traded price while every option trade is valued at premium
  • The total sum of STT that a clearing member is expected to pay is the amount of the total of all the STT taxes of trading members under him.

Investors to trade in options

Sebi is also considering on how to curb the exposure of retail and individual investors in the derivatives segment because a lower STT means higher volume.

Sebi has observed that there is a need to review equity derivative segment considering its trading volume as compared to the cash segment and participants profile. Sebi knows well that the increased volumes in the derivatives market is mainly because of the low STT on options.

The market regulator has also observed that the Indian investors lacks ‘Product Suitability Framework’, which permits access to investors on the basis of their risk intake and financial information of the product. As per the study conducted by the regulator, it was found that the ratio of NSE option chain of equity derivative turnover to the cash market turnover increased more than 10 times to 15.59 in 12 years to March. It was also found that more than half of the trading in the derivative segment by individual investors is contributed by the investors who have an exposure of Rs 1 crore plus in the cash market.

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Vikas Agarwal
the authorVikas Agarwal
Vikas Agarwal is an IIT-Varanasi graduate in Chemical Engineering. He is the Founder and CEO of - an investment advisory website. He is a Business Development Professional but a Value Investor at heart. He writes articles on Finaacle, which focus on simplifying the art of investing and the causes of human misjudgment when it comes to investing. He also shares his experiences as an investor and lessons from some of the greatest investors of all time.

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