Securities Transaction Tax
Also written STT · Securities Transaction Tax (STT)
A central government tax collected by the exchange on the sell side of every futures and option trade — 0.05% of futures traded value, 0.15% of option premium, and 0.15% of settlement price on exercise.
In plain language
STT is a tax on the transaction, not on the profit. It is charged whether you made money or lost it, and it is deducted by the exchange on which the trade took place, which then remits it to the government. You never write the cheque yourself.
Two things about it decide most exam questions. First, it is levied on sell transactions for both futures and options. Second, the value it is charged on is different for each kind of trade: a futures trade is valued at the actual traded price; an option trade is valued at the premium; and an option that is exercised is valued at the settlement price — a vastly larger number, charged to the purchaser.
That last line is where real money is lost by real traders, and it is examined.
How it works
The workbook describes STT as a tax levied on every purchase and sale of securities listed on the Indian stock exchanges — equity, derivatives and equity oriented mutual funds. For derivatives, the working rules are the exchange's, and they run in four steps (Chapter 9, section 9.2).
1. Only sell transactions attract it. STT is applicable on all sell transactions, for both futures and option contracts.
2. Each trade is given a value. A futures trade is valued at the actual traded price; an option trade is valued at the premium. The prescribed rate — 0.05% for futures, 0.15% for options — is applied to that value to get the STT liability. On voluntary or final exercise of an option, STT is levied instead on the settlement price on the day of exercise, and only if the option contract is in the money.
3. Liability is added up the chain. A trading member's liability is the aggregate STT liability of the clients trading through him. A clearing member's liability is the sum total of the STT payable by all the trading members clearing under him.
4. The exchange collects and remits. The exchange on which the transaction took place is required to collect (deduct) the STT and remit it to the Government.
Two more rules complete the picture. Where a derivative contract is settled by physical delivery of shares, it is treated like a delivery-based equity trade, so the delivery rate of 0.1%, payable by both the seller and the purchaser, applies. And in the trading-cost breakdown of Chapter 6, section 6.5, STT sits under statutory charges with GST, stamp duty and SEBI turnover fees; both STT and GST are collected by the Central Government.
The formula
Rates effective 1 April 2026 (Union Budget 2026-27):
| Taxable securities transaction | Rate | Payable by | Charged on |
|---|---|---|---|
| Sale of an option in securities | 0.15% | Seller | The option premium |
| Sale of an option in securities, where the option is exercised | 0.15% | Purchaser | The settlement price |
| Sale of a futures in securities | 0.05% | Seller | The price at which the futures is traded |
Where a derivative contract is settled by physical delivery of shares, it is treated like a delivery-based equity transaction, and the delivery-based rate of 0.1%, payable by both the seller and the purchaser, applies.
STT on futures = Traded price × Lot size × 0.05%
STT on option sale = Premium × Lot size × 0.15%
STT on exercise = Settlement price × Lot size × 0.15%
A worked example
1. A futures trade, with all its costs. The workbook's full trading-cost table. A trader takes a short position of 1 lot of index futures at 17,500, lot size 50:
Contract value = 1 × 50 × 17,500 = Rs 8,75,000
| Charge | Rs | |
|---|---|---|
| 1 | Contract value | 8,75,000.00 |
| 2 | Brokerage @ 0.03% | 262.50 |
| 3 | STT @ 0.05% | 437.50 |
| 4 | Exchange fees @ 0.002% | 17.50 |
| 5 | SEBI charges @ Rs 10 per crore | 0.88 |
| 6 | IPFT charges @ Rs 10 per crore | 0.88 |
| 7 | GST @ 18% on (2 + 4 + 5 + 6) | 50.72 |
| Total trading cost | 769.97 |
STT alone is 57% of the total cost of the trade. Note two things the workbook flags: the 0.03% brokerage is illustrative only, since most brokers now charge a flat rate per order; and stamp duty is absent because it is charged only on the buy side (0.002%, or Rs 200 per crore, for equity futures buyers; 0.003%, or Rs 300 per crore, for equity option buyers).
2. The exercise trap. A trader holds 1 lot of a 25,000-strike Nifty call, lot size 50. At expiry the settlement price is 25,180, so the option is in the money by 180 points and is worth about Rs 180 of premium.
| He squares off in the market | He lets it be exercised | |
|---|---|---|
| Value STT is charged on | Premium: 180 × 50 = Rs 9,000 | Settlement price: 25,180 × 50 = Rs 12,59,000 |
| Rate | 0.15% (as seller of the option) | 0.15% (as purchaser, on exercise) |
| STT | Rs 13.50 | Rs 1,888.50 |
His gross gain is 180 × 50 = Rs 9,000 either way. Squaring off costs him Rs 13.50 in STT. Letting the option go to exercise costs him Rs 1,888.50 — over 20% of the entire payoff — because the tax base jumps from the premium to the full settlement price. Nothing about his position changed; only the route out did.
Why NISM asks about it
Chapter 9, section 9.2 (Taxation of derivative transaction in securities), gives the rate table, the valuation rules and the collection chain. Chapter 6, section 6.5 (Trading costs), gives the same 0.05% rate inside the full cost table reproduced above, under statutory charges — alongside GST, stamp duty and SEBI turnover fees. Expect the rate table as a recall question, the cost table as a computation, and one conceptual question on the base: premium for an option sale, settlement price on exercise, traded price for a futures. Note also that STT paid is eligible as a deduction under the Income Tax Act, 1961, when F&O income is assessed as non-speculative business income.
Common exam traps
- Check which edition your workbook is on before quoting a rate. This page teaches the Union Budget 2026-27 rates effective 1 April 2026, as the Series VIII workbook states them. Several other series that teach STT are still on the pre-April-2026 table — Series VII, for instance, gives 0.020% on the sale of a futures contract and 0.100% on option premium, footnoted as subject to change from that date. The paper marks its own workbook; do not carry a rate across from another series.
- The rate alone is not the answer; the base matters more. Option STT on a sale is 0.15% of the premium; on exercise it is 0.15% of the settlement price. Same rate, two orders of magnitude apart.
- On exercise, STT is payable by the purchaser, not the seller — the only row in the table where the buyer pays.
- STT is levied on sell transactions for both futures and options. There is no STT on the purchase of a futures contract or on the purchase of an option.
- STT is charged on turnover, not on profit. A loss-making trade pays exactly the same STT.
- Physical settlement switches you to the equity rate of 0.1%, payable by both sides.
- Stamp duty is the mirror image of STT — buy side only, at 0.002% for futures and 0.003% for options. Do not read "statutory charges" as one undifferentiated block.
- STT and GST are both central government taxes, but GST is charged at 18% on brokerage plus transaction charges, never on the contract value.
- On voluntary or final exercise, STT is levied on the settlement price only if the option contract is in the money.
Where this is taught
- Series VII · Chapter 3: Introduction to Securities Broking Operationsintroduced here
- Series V-A · Chapter 8: Taxationintroduced here
- Series VIII · Chapter 6: Trading Mechanismintroduced here
- Series XIX-B · Chapter 9: Taxationintroduced here
- Series II-B · Chapter 11: Operational Concepts of Mutual Fundsintroduced here
- Series III-A · Chapter 2: Regulatory Framework - General Viewintroduced here
- Series X-B · Chapter 11: Taxation of Equity Productsintroduced here
- Series V-D · Chapter 8: Taxationintroduced here
- Series XIX-C · Chapter 16: Taxationintroduced here
- Series V-B · Chapter 8: Mutual fund Taxationintroduced here
- Series XIX-E · Chapter 14: Taxationintroduced here
- Series VIII · Chapter 9: Accounting and Taxation
Related terms
- Impact costThe percentage by which a market order's actual execution price degrades against the ideal price — the mid-point of the best bid and the best offer — and so the real cost of trading in size.
- Futures contractA standardised forward traded on an exchange, where the exchange fixes every term except the price and the clearing corporation guarantees settlement, so neither side carries the other's default risk.
- Option premiumThe price an option buyer pays the seller for the right the contract carries — non-refundable, and made up of intrinsic value plus time value.
- Non-speculative business incomeProfit or loss from derivatives traded on a recognised stock exchange, taxed under "Profits and Gains from Business or Profession" as ordinary business income since the Finance Act, 2005 amendment.
- Physical settlementSettling a derivative on expiry by actual delivery of the underlying shares against payment. In India, all stock futures and options open at expiry have been physically settled since October 2019.
- Section 44ADThe presumptive taxation scheme under which F&O income can be assessed at 6% of turnover without allowing expense deductions, available only if total turnover does not exceed Rs 2 crore.
- Maximum Marginal RateThe highest slab rate of income tax, applied to a Category III AIF's business income at fund level because the fund gets no pass-through — 30% before surcharge and cess.
- Minimum Alternate TaxA floor tax on a company's book profits under Section 115JB, payable when it exceeds tax computed the normal way — which catches corporate investors receiving Category III AIF distributions.
- Transaction ExpensesCosts of buying, selling or disposing of a Category III AIF's investments — brokerage, depository and custodian transaction charges, STT and exchange charges — borne by the fund and allocated pro-rata across classes.
- Regulatory RiskThe risk that laws and regulations change unfavourably — raising costs or altering competition — and hurt investment returns. The workbook treats it as a part of legal risk.
- Short Term Capital GainThe gain on mutual fund units sold within the holding period — 12 months or less for equity-oriented funds, 24 months or less for most others — taxed at 20% for equity funds and at slab rate otherwise.
- Stamp dutyA levy on mutual fund units from 1 July 2020: 0.005% of the amount invested on every issue of units — lump sum, SIP, STP, switch-in, IDCW reinvestment — and 0.015% on transfers.
- Short-term capital assetA capital asset taxed as short-term: listed securities held 12 months or less, unlisted securities 24 months or less, plus MLDs, specified mutual funds and unlisted bonds deemed short-term whatever the holding.
- Equity-oriented fundA fund that puts at least 65% of its proceeds into listed domestic equity shares — the tax definition that unlocks the 12.5% long-term rate and the Rs 1,25,000 annual exemption.
- Stock Lending and BorrowingA screen-based scheme under which an investor lends securities to a borrower through an Authorized Intermediary for a fee — and, under section 47(xv), it is not a transfer.
- Stock-in-tradeSecurities or goods held for the purpose of business — excluded from the definition of capital asset, so profit on their sale is business income, not capital gains.
- Index ETFA mutual fund scheme that invests in securities in the same proportion as an index of securities and lists on an exchange; it is taxed exactly like a listed equity oriented fund.
- Net Settlement of cash and F&OSEBI's mechanism, from November 30, 2022, of netting cash-segment obligations with physical-settlement obligations of expiring stock derivatives into one settlement.
- No-arbitrage boundsThe band around the fair futures price, created by transaction costs, taxes and margins, within which a mispricing is too small to arbitrage profitably — so prices can sit there undisturbed.