The Securities Transaction Tax (STT) is a tax on securities purchases and sales in India. It is to decrease tax evasion and guarantee compliance in the securities market. STT was established by the Finance Act of 2004 and covers a wide range of financial products, such as equity shares that are listed on reputable stock exchanges, derivatives like contracts for futures and options, equity-oriented mutual funds, and, occasionally, bonds and debentures.
Types of Transactions
- Purchase and Sale: When securities are purchased or sold, STT is applied.
- Intraday Transactions: Even day trading, or short-term purchases and sales made on the same day, is subject to tax.
- Delivery-based Transactions: Transfers of securities upon delivery are likewise subject to tax.
Equity
Ownership in a business is referred to as equity, and stock shares usually represent it. It stands as a claim on the resources and profits of a business. If the business does well, dividends and capital gains are distributed to shareholders. The two primary categories are preferred equity, which pays fixed dividends but has no voting power, and common equity, which offers voting rights and the possibility of larger profits. Equity can be used to finance, invest, or raise money for operations and expansion.
Futures and Options
Speculation-based financial derivatives include futures and options that also function as hedging instruments. Future contracts bind participants as buyers who need to purchase or sellers who have to sell assets at predetermined prices for specific future dates—the derivatives trade on exchanges under standardized conditions. Through options, the specific owner of a right obtains the option to purchase or sell an asset within a set period at a predetermined price. However, they do not require any obligation to perform either action. Options exist in the “call” and “put” versions, representing the buy and sell functions. The two instruments assist traders by providing leverage capabilities and risk management tools.