All you need to know about security transaction tax in mutual funds

STT of 0.001 percent is levied on the sale of units through stock exchange. What is the security transaction tax in mutual funds? Security Transaction Tax (STT) is a direct tax which is levied on buying/selling of financial instruments like equity, debentures, bonds, derivatives, mutual funds. In mutual funds, the STT is levied only on sale of MF units in equity and balanced funds, applicable on both open ended and close ended schemes.  It is also applicable on re-purchase of units by AMCs in equity oriented schemes. However, STT is not payable on transactions in debt and debt oriented schemes.  When it was implemented and why it has been introduced? STT was introduced by the Union Finance Minister P Chidambaram during the 2004-05 budget and came into effect from 2006. Earlier, many investors tried to avoid capital gains tax as they didn’t prefer to disclose their actual profits made from trading infinancial securities. Hence, to curb this avoidance on capital gain tax, the government introduced STT. What is the rate of STT in mutual funds? STT is applicable at different rates on the value of taxable transactions. No STT is levied during the NFO.  However, if an investor sells it thereafter they have to pay STT at the following rate: On sale of units through stock exchange (close ended mutual funds or ETF units) - 0.001 percent On sale of units through AMC(non ETF and open ended mutual funds) – 0.025 percent The above rates will be effective from 1 July 2013. However, the rate of tax that is deducted is determined by the central government, and it varies from time to time. Who deducts the STT? AMCs and brokerage houses deduct STT at source while executing the transaction. If an investor redeems his mutual fund units then AMCs are authorized to deduct at source while if an investor sells his/her units to others through stock exchange then the respective brokerage house through which the client has sold will deduct the STT at source.