STT on equity-oriented mutual fund redemption

Securities transaction tax (STT) is a direct tax levied on the value of transactions in specified securities, including units of equity-oriented mutual funds. For mutual funds, STT applies on the redemption of equity-oriented fund units at the rate of 0.001 per cent of the redemption value. It was introduced by the Finance (No. 2) Act, 2004 and is administered under Chapter VII of that Act.

STT is a Central Government tax collected at the point of transaction by the AMC (acting as a responsible person), and is credited to the Consolidated Fund of India. It is separate from, and in addition to, capital gains tax on the same transaction.

Applicable rate (as of 2024–25)

Note: STT applies only on the redemption/sale, not the purchase of equity-oriented mutual fund units. This asymmetry (purchase-exempt, redemption-taxed) is a feature retained since the 2004 introduction.

Finance Act 2023 rate revision

The Finance Act, 2023 increased STT on F&O transactions significantly (futures: 0.0125%, options: 0.0625%), but the rate on equity-oriented MF redemptions remained unchanged at 0.001 per cent.

What constitutes an equity-oriented fund?

Section 10(23D) of the Income Tax Act, 1961 and the Finance (No. 2) Act, 2004 define equity-oriented funds as those investing at least 65 per cent of their assets in domestic equity or equity-related instruments. This includes:

• Large-cap, mid-cap, small-cap, and flexi-cap equity funds.
• ELSS (equity-linked savings scheme) funds.
• Aggressive hybrid funds with ≥65% equity exposure.
• Arbitrage funds (treated as equity-oriented for tax purposes, as they invest primarily in equities with hedged positions).
• International funds of funds investing ≥65% in foreign equity funds, excluded (they are treated as non-equity/debt funds for STT and tax purposes).

Pure debt funds, liquid funds, gilt funds, and gold ETFs are not equity-oriented and therefore do not attract STT.

How STT is computed and deducted

STT is computed on the full redemption value:

\[ \text{STT} = \text{Units redeemed} \times \text{Applicable NAV} \times 0.00001 \]

For a redemption of 500 units at NAV ₹120:

\[ \text{Redemption value} = 500 \times 120 = ₹60{,}000 \]

\[ \text{STT} = 60{,}000 \times 0.00001 = ₹0.60 \]

At ₹0.60 per ₹60,000 redeemed, STT is economically trivial relative to the total expense ratio or exit load. For a ₹1 crore redemption, STT is ₹100.

STT and capital gains tax interaction

STT has an important interaction with the capital gains tax treatment of equity fund investments:

Under the Income Tax Act (Section 112A, introduced by Finance Act, 2018), long-term capital gains (LTCG) on equity-oriented fund units exceeding ₹1,25,000 per year are taxed at 12.5 per cent (increased from 10 per cent in the Finance Act, 2024), but only if STT was paid on both the acquisition and redemption. This requirement is referred to as the “STT condition” for concessional LTCG rates.

For equity-oriented MF units:

• STT on purchase: Nil (waived for mutual fund units, unlike stock market purchases).
• STT on redemption: 0.001%.
• SEBI/CBDT circular has clarified that the STT waiver on purchase of MF units does not disqualify the investor from the concessional Section 112A rate.

Short-term capital gains (STCG) on equity fund units (held ≤12 months) are taxed at 20 per cent (Finance Act, 2024) regardless of STT.

See capital gains tax in India for the full rate structure.

STT and ETFs

For equity ETF units traded on a stock exchange (NSE or BSE), STT applies on the sell transaction at 0.001 per cent, identical to direct equity shares. The ETF’s NAV-based transactions (large-lot creation and redemption with market makers) also attract STT.

STT credit in ITR

STT paid is disclosed separately in the Annual Information Statement (AIS) and Taxpayer Information Summary (TIS) generated by the Income Tax Department. STT paid on business income transactions can be claimed as a deduction from business profits (Section 36(1)(xv) of Income Tax Act). For retail investors redeeming mutual fund units as capital gains (the standard treatment), STT is not separately deductible, it reduces proceeds but is subsumed into the gain computation.

Comparison of transaction costs

STT is the smallest of these charges by a wide margin for typical mutual fund redemptions.

See also

• Stamp duty on mutual fund units
• Exit load in mutual funds
• Capital gains tax in India
• Total expense ratio
• GST on mutual fund management fees
• Mutual fund
• SEBI

References

1. Finance (No. 2) Act, 2004, Chapter VII, Securities Transaction Tax.
2. Income Tax Act, 1961, Section 112A (concessional LTCG rate with STT condition).
3. Finance Act, 2024, Revised capital gains tax rates and STT rates.
4. CBDT circular clarifying STT waiver on MF purchase and Section 112A eligibility.
5. AMFI, STT disclosure in mutual fund transaction statements.