STT on options exercise
Overview
Securities transaction tax on options exercise is the central-government levy charged when an in-the-money option is settled at expiry rather than sold in the market, computed at 0.15 per cent of the intrinsic, or settlement, value of the exercised quantity (Finance Act 2026, effective 1 April 2026; previously 0.125 per cent). It is collected at source by the exchange under the Finance (No. 2) Act 2004 and passed through on the contract note. The defining feature is the base: an exercised option is taxed on intrinsic value, while an option sold to close is taxed at 0.15 per cent of premium on the sell side. Those two bases can differ by an order of magnitude.
The asymmetry is the reason expiry-week guidance pushes traders to square off in-the-money positions. Premium near expiry is small. Intrinsic value, the in-the-moneyness multiplied by the lot size, can run to tens of thousands of rupees per lot on a stock that finishes well past its strike. A long call holding Rs 8 of premium that finishes Rs 80 in the money is taxed not on Rs 8 but on Rs 80 per share, across the full lot. That is how STT can swallow the entire residual value of an option that looked nearly worthless on screen.
This article sets out the statutory basis of the levy, the 2019 narrowing from full settlement value to intrinsic value, the current rate and how it splits between sale and exercise, a worked example showing the trap, and the two clean ways to avoid it. It sits alongside the charge-by-charge breakdown in options exercise charges at Zerodha and the settlement mechanics in physical settlement of stock F&O .
What securities transaction tax is
Securities transaction tax (STT) is a transaction tax the central government imposes on the purchase and sale of securities and derivatives on recognised Indian exchanges. It was introduced by the Finance (No. 2) Act 2004, which carries the rate schedule in Chapter VII. The exchange collects STT at source on each taxable trade and remits it; a broker such as Zerodha neither sets the rate nor keeps the money, a point covered in the dedicated securities transaction tax and STT and CTT on Zerodha trades notes.
For options the schedule defines two separate taxable events with separate bases. The sale of an option in the market is one event. The exercise or settlement of an in-the-money option at expiry is the other. The rate looks similar across both today, but the value it is applied to is not, and that gap is the whole subject of this article.
The base: intrinsic value, not premium
When an option is sold to close, STT is charged on the option premium. When an in-the-money option is exercised at expiry, STT is charged on the intrinsic value of the exercised quantity, that is, the settlement value by which the option finishes in the money.
Intrinsic value for a call is the settlement price minus the strike, multiplied by the lot size, when that figure is positive. For a put it is the strike minus the settlement price, times the lot size. Premium is simply the market price of the option contract. Near expiry the time value in an option has decayed close to zero, so the premium of a deep in-the-money option is mostly intrinsic value anyway. The difference that bites is not premium against intrinsic value of the same option; it is that the trader who sells pays STT on the premium they receive, while the trader who lets it exercise pays STT on intrinsic value that, for a deep position, has accumulated to many times any premium ever paid.
The pre-2019 regime and the September 2019 narrowing
Before September 2019, an exercised option was taxed on the full settlement value, the entire contract value, not on intrinsic value alone. A call exercised on a stock trading at Rs 1,500 with a lot of 400 was taxed on Rs 6,00,000 of contract value regardless of how far in the money it finished. That produced the notorious outcomes where a trader holding a close-to-the-money option worth a few hundred rupees of premium faced an STT bill running into thousands or tens of thousands.
From 1 September 2019 the base was narrowed to intrinsic value. The amendment changed the taxable value of an exercised option from the full settlement price to the difference between the settlement price and the strike, the in-the-moneyness. The change cut the exercise STT sharply for options that finish only modestly in the money, because intrinsic value is small there. It did not remove the trap for deep positions, where intrinsic value is large by definition.
Current STT rates on options and futures
The rates below take effect from 1 April 2026 under the Finance Act 2026, which amended the Finance (No. 2) Act 2004 schedule. The exercised-option rate rose from 0.125 per cent to 0.15 per cent of intrinsic value, the sale-of-option rate from 0.1 per cent to 0.15 per cent of premium, and the futures sale rate from 0.0125 per cent to 0.02 per cent, all on the dates the Act specifies (Finance Act 2026).
| Transaction | STT base | Rate from 1 April 2026 | Side charged |
|---|---|---|---|
| Sale of an option in securities | Option premium | 0.15 per cent | Sell side only |
| Exercise of an option in securities | Intrinsic (settlement) value | 0.15 per cent | On the exercised quantity |
| Sale of a futures contract | Traded price | 0.02 per cent | Sell side only |
| Purchase of equity delivery | Trade value | 0.1 per cent | Buy side |
| Sale of equity delivery | Trade value | 0.1 per cent | Sell side |
The first two rows are the heart of the matter. The headline rate is identical, 0.15 per cent, but the premium base and the intrinsic-value base diverge as soon as an option finishes well in the money. The exercise rate sits at 0.15 per cent of intrinsic value as listed on the Zerodha charges page, as of 21 June 2026. The pre-revision figure of 0.125 per cent applied until 31 March 2026 and is the number some older corpus pages and third-party guides still carry.
Why the bill can exceed the apparent profit
The trap surfaces when a long option that looks nearly worthless on screen is in fact deep in the money. Consider a long call on a single stock with a Rs 1,000 strike, lot size 550, where the stock finishes the expiry session at Rs 1,250. The intrinsic value is Rs 250 per share, or Rs 1,37,500 across the lot. STT on exercise is 0.15 per cent of Rs 1,37,500, which is Rs 206.25 per lot.
Now suppose the trader bought that call weeks earlier for a Rs 40 premium, Rs 22,000 for the lot, and never sold it. The position is sitting on a large paper gain, so here the STT is small against the profit. The danger case is the inverse: a call bought for a high premium that decayed, or a position the trader forgot, where the intrinsic-value STT lands on a value the trader was not tracking. The point is mechanical. STT on exercise tracks intrinsic value, which can be large in absolute terms, while the premium the option is quoting near expiry can be a sliver of that. A trader watching only the Rs 8 of premium left on the screen sees an Rs 8 line in their head, not the 0.15 per cent on the full in-the-moneyness that the contract note will carry.
For stock options the STT line is not even the worst of it. An exercised in-the-money stock option converts into a delivery obligation under compulsory physical settlement of stock F&O , bringing in stepped-up delivery margins, the full cash contract value to take delivery, brokerage on the eventual sale, and a DP charge. The STT line is the visible tip; the delivery chain is the larger cost. For cash-settled index options there is no delivery chain, so the exercise STT on intrinsic value is the only exercise-specific cost.
Worked example: square off versus let it exercise
Take a long in-the-money call on a single stock, one lot, held into expiry against the alternative of selling it the day before. Assume a Rs 1,500 strike call, lot size 400, with the stock closing the expiry session at Rs 1,650, and around Rs 152 of premium quoting the day before expiry.
| Item | Sell the option before expiry | Let it exercise (physical settlement) |
|---|---|---|
| STT base | Premium: Rs 152 x 400 = Rs 60,800 | Intrinsic value: Rs 150 x 400 = Rs 60,000 |
| STT on the option leg | 0.15% x 60,800 = Rs 91.20 (sell side) | 0.15% x 60,000 = Rs 90.00 |
| Brokerage on the option | Rs 20 (flat, sell order) | Rs 0 (exercise is not a placed order) |
| Resulting delivery | None | Take 400 shares, pay Rs 6,60,000 contract value |
| STT on selling delivered shares | Not applicable | 0.1% x (1,650 x 400) = Rs 660.00 |
| DP charge on the sale | Not applicable | Rs 15.34 per scrip |
| Cash to arrange | None beyond premium | Rs 6,60,000 to take delivery |
The STT on the option leg is near identical, Rs 91.20 against Rs 90.00, because this call finished only modestly in the money, so its premium and intrinsic value sit close together. The gap is the chain exercise sets off for a stock option: a Rs 6.6 lakh cash call, a Rs 660 STT line on the delivery sale, and the DP charge, against one Rs 20 brokerage line for selling the option cleanly. Push the example deeper in the money and the option-leg STT itself grows with intrinsic value, while the sale alternative is capped by the small premium left.
How to avoid the exercise STT
Two clean routes avoid the levy, and both are about acting before the expiry session closes.
The first is to square off the in-the-money option in the market before expiry. A sale is taxed on premium at 0.15 per cent, and for a near-expiry option with little time value that premium is close to the intrinsic value but the trade is a clean exit with no delivery obligation behind it. The trader pays one flat brokerage line and the premium-based STT, and walks away. This is the route expiry-week alerts from brokers point to, and it is set out operationally in how to avoid physical settlement of options .
The second is to let deep out-of-the-money options lapse. An option that finishes out of the money expires worthless, carries no exercise, and so carries no exercise STT. There is nothing to settle. The only positions that attract exercise STT are those that finish in the money, so a trader who lets clearly worthless options expire and closes the in-the-money ones avoids the levy on both sides.
The close-to-the-money band is the awkward middle. For a stock option that finishes within the first three in-the-money strikes of the settlement price, the do not exercise option facility, reinstated from 28 April 2022, lets a trader instruct the clearing member not to exercise, so the contract is dropped rather than physically settled. That facility removes the delivery obligation for those narrow strikes; the cleaner general practice for any in-the-money position the trader does not want delivered is to square it off in the market well before the close.
Where exercise STT sits in the charge stack
Exercise STT is one line in a larger stack, not a charge a broker invents. The other components, exchange transaction charges, the SEBI turnover fee, GST, stamp duty, and the DP charge on any resulting delivery sale, are detailed in options exercise charges at Zerodha and the wider exchange transaction charges reference. What makes the exercise line distinct is purely its base: 0.15 per cent of intrinsic value rather than 0.15 per cent of premium. Everything else about the cost of an exercise flows from the delivery it triggers for stock options, covered in physical settlement of stock F&O and physical delivery risks in stock F&O .
See also
- Options exercise charges at Zerodha
- Physical settlement of stock F&O
- Physical delivery risks in stock F&O
- Physical delivery timing on Zerodha
- How to avoid physical settlement of options
- How to physically settle an in-the-money option
- Do not exercise option
- Securities transaction tax
- STT and CTT on Zerodha trades
- STT hike of October 2024 on F&O
- Exchange transaction charges
- Zerodha charges and hidden costs
- Zerodha F&O charges
- F&O taxation in India
- Expiry day options trading
- Unsquared options on expiry
- In the money, at the money and out of the money
- Option premium
- Strike selection for options
- Auto square-off charges
- F&O segment on Zerodha
- Futures and options
- Nifty
- Bank Nifty
- Demat account
- Zerodha
- Kite by Zerodha
- National Stock Exchange
- Bombay Stock Exchange
- Securities and Exchange Board of India
External references
- Zerodha charges
- Securities Transaction Tax, how it is calculated (Zerodha support)
- Securities Transaction Tax (NSE)
- Zerodha Varsity: physical settlement of futures and options
- Securities and Exchange Board of India
References
- Finance (No. 2) Act 2004, Chapter VII, securities transaction tax schedule, as amended by the Finance Act 2026 (effective 1 April 2026: sale of option 0.15 per cent of premium; exercise of option 0.15 per cent of intrinsic value; sale of futures 0.02 per cent).
- Finance (No. 2) Act 2017 amendment narrowing the exercised-option STT base to intrinsic value, effective 1 September 2019.
- Zerodha charges page, zerodha.com/charges, as of 21 June 2026.
- National Stock Exchange, securities transaction tax on equity derivatives, statutory rate notification.