If you invest in mutual funds or shares, it is important to know about the Securities Transaction Tax. The rate and variation of capital gains tax depend on it. Let’s understand what it is. In this article, we will also share all the details on how it affects the middle class before investing.
What is Securities Transaction Tax (STT)?
The Securities Transaction Tax (STT) is a direct tax, just like income tax, and you are responsible for paying it directly. It was introduced in the 2004 budget and has been in effect since October of that year. The main purpose of this tax was to prevent tax evasion.
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Where is STT Applied?
STT applies to the buying and selling of certain financial securities in the stock market. This includes:
- Shares, Bonds, and Debentures – These are traded on the stock exchange. Debenture stocks, unlike debt instruments, pay dividends but have lower priority in repayment if the company goes bankrupt.
- Derivatives – Investments whose value depends on other investments.
- Investment Units – Larger investment papers issued in units.
- Government Securities – Those that function similarly to equity.
- Interest on Debt Instruments – Earnings from debt-based investments.
- Mutual Funds in Equity – Mutual funds that invest primarily in equity.
When is STT Not Applicable?
If these investment securities are transferred outside the stock market, STT does not apply.
How the Securities Transaction Tax (STT) Affects the Middle Class
Securities Transaction Tax (STT) can have a notable impact on the middle class, especially those investing in shares, mutual funds, or ETFs. As STT is applied to every purchase and sale of these financial securities, it can increase the overall cost of transactions. For the middle class, who may be making smaller, more frequent investments, these additional taxes can reduce the potential returns on their investments. Understanding STT is crucial for making informed investment decisions and managing the overall cost of trading.