A Tax on Your Gains, Even Before You Make Them: The Burden of STT
The Securities Transaction Tax (STT) has become a silent but significant burden on Indian investors, eating into potential profits before they are even realized. When it was introduced in 2004, STT was meant to replace the Long-Term Capital Gains (LTCG) tax. But in 2018, LTCG tax made a comeback, while STT stayed, creating a “double taxation” scenario that is raising concerns among investors.
STT is a tax on transactions, not on profits. It is collected by the exchange at the time of a trade, regardless of whether the investor makes or loses money. As one expert puts it, “The government profits even when you lose money or just break even. Heads they win, tails… they still win.”
The Rising Cost of Trading
STT collections have grown dramatically, highlighting the increasing burden on investors:
- FY 2022-23: Rs. 25,085 crore
- FY 2023-24: Rs. 32,000 crore
- FY 2024-25: Rs. 53,296 crore (provisional)
This represents a massive 113% jump in just two years. The revenue from STT now dwarfs the combined earnings of many brokers and traders. Nithin Kamath, CEO of Zerodha, noted that his company collects more STT for the government than it earns in brokerage fees. He calls STT the single biggest tax burden for traders, influencing which financial instruments they choose to trade.
How STT Works: A Closer Look at the Rates
The tax rates vary based on the type of transaction. For example:
- Equity Intraday: A 0.025% tax on the sell side.
- Equity Delivery: A 0.1% tax on both the buy and sell sides. This means even long-term investors who simply buy and hold are not spared.
- Futures: A 0.02% tax on the sell side.
- Options: A 0.125% tax on intrinsic value if exercised, or 0.1% on the premium for short positions.
This upfront tax hits retail investors and frequent traders particularly hard, as it can turn a marginally profitable trade into a loss. Critics argue that this layered tax structure penalizes risk-taking and discourages participation in the equity markets, despite India’s push to deepen its capital markets.
In a system with both STT and capital gains taxes, investors are essentially paying the government twice: once for the act of trading and again for the profit they might make.