Budget 2024: From 2004 to 2024; evolution of STT and its impact on the capital market

In a Union Budget announcement on Tuesday, Finance Minister Nirmala Sitharaman revealed significant amendments to securities transaction tax (STT). Addressing the nation, she outlined the government's decision to adjust STT rates, particularly on futures and options (F&O) trades, as part of the 2024 budget reforms. These changes aim to redefine the fiscal landscape governing financial markets.

The Securities Transaction Tax was initially introduced in the 2004 Budget and enforced from October of that year by then-Finance Minister P. Chidambaram. It was introduced to combat tax evasion related to capital gains. At the time of its introduction, it was anticipated that STT would replace the long-term capital gains (LTCG) tax.

Under the revised provisions, the STT on F&O transactions sees a notable increase:

• The tax on futures transactions rises from 0.0125% to 0.02% of the traded price.
• Similarly, the tax on options transactions climbs from 0.0625% to 0.1% of the option premium.

The Finance Minister emphasised, "It is proposed to increase the rates of STT on sale of an option in securities from 0.0625 per cent to 0.1 per cent of the option premium, and on sale of a futures in securities from 0.0125 per cent to 0.02 per cent of the price at which such futures are traded.”

Understanding securities transaction tax

The STT is a mandatory levy implemented as a percentage of the transaction value. Its primary objective is to curb tax evasion by ensuring that transactions are taxed at the source. The tax applies to various financial instruments traded on exchanges, including stocks, futures, options, mutual funds, and exchange-traded funds (ETFs).

Differential application based on transaction type

The application of STT varies based on the nature of the transaction:

• For delivery-based equity share trades, the STT rate is set at 0.1% of the transaction value.
• Intraday transactions and other types of trades have distinct STT rates tailored to their specific transaction characteristics.

Impact on market dynamics

The revised STT rates are expected to influence market behaviour and trading strategies. Investors and market participants may reassess their approach to F&O transactions due to the increased tax burden. Moreover, the adjustment in STT rates underscores the government's commitment to maintaining transparency and accountability in financial transactions.