The Indian capital market has witnessed exponential growth in the derivatives segment, particularly Futures and Options (F&O). With rising participation from retail traders, institutional investors, and foreign portfolio investors, regulatory oversight and taxation have become increasingly important. One such levy is the Securities Transaction Tax (STT), which directly affects every derivatives trader operating on recognized stock exchanges in India.
While STT may appear to be a small percentage, its impact on trading costs, profitability, and tax computation is significant—especially for frequent traders. This article provides a comprehensive explanation of STT on Futures and Options, covering its meaning, applicability, rates, calculation, income-tax treatment, and overall impact on traders.
Meaning and Objective of Securities Transaction Tax (STT)
Securities Transaction Tax (STT) is a direct tax levied on the purchase or sale of securities traded on recognized stock exchanges in India. It was introduced through the Finance Act, 2004 and is governed by the Securities Transaction Tax Act, 2004.
Objectives of STT:
- To ensure easy and transparent tax collection
- To curb tax evasion in the securities market
- To replace complex capital gains tracking with transaction-based taxation
- To widen the tax base by taxing high-volume market participants
STT is collected by the stock exchange at the time of settlement and remitted to the Government of India, leaving no scope for default by traders.
Securities Covered Under STT
STT applies only to transactions carried out on recognized stock exchanges and includes:
- Equity shares
- Equity-oriented mutual funds
- Futures contracts
- Options contracts
This article focuses specifically on STT applicability in Futures and Options trading.
Overview of Futures and Options Trading
1. Futures Contracts
A futures contract is a standardized agreement to buy or sell an underlying asset (such as an index or stock) at a predetermined price on a specified future date.
2. Options Contracts
An options contract gives the buyer the right, but not the obligation, to buy or sell an underlying asset at a specified price before or on the expiry date. Options include:
- Call options
- Put options
3. Applicability of STT on Futures and Options
A crucial feature of STT in the derivatives segment is that it is levied only on the selling side of the transaction. Buyers of futures and options do not pay STT.
STT on Futures Trading
Rate of STT on Futures
- 0.0125% of the sell value
- Applicable only to equity futures
- Charged when:
- A position is squared off, or
- A contract expires
- A position is squared off, or
Important Points:
- STT is payable regardless of profit or loss
- Applicable only to the seller
- Calculated on the total contract value, not just margins
Example:
A trader sells a Bank Nifty futures contract worth ₹25,00,000.
STT = 0.0125% × ₹25,00,000
= ₹312.50
Even if the trader incurs a loss, STT must still be paid.
STT on Options Trading
STT on options depends on how the option position is closed.
1. STT on Options Squared Off Before Expiry
This is the most common scenario for retail traders.
- STT Rate: 0.0625%
- Charged on: Option premium
- Paid by: Option seller
Example:
A trader sells an option at a premium of ₹150 per lot.
Total premium received = ₹30,000
STT = 0.0625% × ₹30,000
= ₹18.75
2. STT on Exercised Options (At Expiry)
If an option expires in-the-money (ITM) and is exercised:
- STT Rate: 0.125%
- Charged on: Intrinsic value
- Intrinsic value = Settlement price – Strike price
Example:
Strike price = 17,500
Settlement price = 17,700
Intrinsic value = 200 points
If lot value = ₹40,000
STT = 0.125% × ₹40,000
= ₹50
This scenario is less common for retail traders, as most positions are squared off before expiry.
Comparative Summary of STT on Futures and Options
| Particulars | Futures | Options |
| STT Rate | 0.0125% | 0.0625% / 0.125% |
| Charged On | Contract value | Premium / Intrinsic value |
| Buyer Pays STT | No | No |
| Seller Pays STT | Yes | Yes |
| Refundable | No | No |
| Deductible as Expense | Yes (business income) | Yes (business income) |
STT and Income Tax Treatment
1. Nature of F&O Income
As per the Income Tax Act, income from Futures and Options is treated as non-speculative business income, even if trades are intraday.
2. Deductibility of STT
For F&O traders:
- STT is considered a business expense
- It is fully deductible while calculating net taxable business income
- Allowed under Section 37 of the Income Tax Act
This provides relief compared to equity investors, where STT is not deductible against capital gains.
STT vs Other Trading Charges
STT is only one component of total trading costs. Others include:
- Brokerage
- Exchange transaction charges
- SEBI charges
- GST
- Stamp duty
Among these, STT often forms a major portion, especially in high-value futures trades.
Impact of STT on Trading Strategies
1. High-Frequency Traders
- STT significantly increases costs
- Scalping and low-margin strategies are heavily affected
Positional Traders
- Impact is relatively lower
- Still needs to be factored into risk-reward calculations
Options Sellers
- Higher STT compared to futures
- Needs careful premium and volatility analysis
Advantages and Disadvantages of STT
Advantages
- Simple and automatic tax collection
- Reduces tax evasion
- Transparent and easy to comply with
Disadvantages
- Increases transaction costs
- Paid even in loss-making trades
- Disincentivizes frequent trading
Conclusion
Securities Transaction Tax is an unavoidable and significant cost component in Futures and Options trading in India. Although the rates appear nominal, their cumulative impact can substantially reduce net trading profits, especially for active traders.
A clear understanding of STT rates, calculation methods, and tax treatment allows traders to make informed decisions, structure efficient trading strategies, and plan their taxes better. Before entering the derivatives market, traders must account for STT not merely as a tax, but as a critical factor influencing long-term trading sustainability.