What Is Securities Transaction Tax? How Does It Affect Mutual Fund Investments?

Here is all that you need to know about Securities Transaction Tax:

Securities Transaction Tax or STT was introduced in India in the 2004 budget. This came into picture when LTCG on (for more on tax on mutual funds read all you need to know about mutual funds taxes in India) investments in equity markets was made tax free and to avoid tax evasion on capital gains. STT is a direct tax and is charged by the Union Government of India.
taxes in MF wikipedia
STT in Equity and MF
STT is a tax that is charged on the entire value of the investments to the individual investors, corporates and investment companies on every purchase and sale of Shares, ETFs (read ETFs vs mutual funds), Derivatives, Equity oriented units i.e., any such investment that needs to be transacted on the stock exchange and on sale of equity mutual fund (Read basics of mutual funds) units to the mutual fund. In 2013 the rates on taxes were revised and reduced owing to protests.

The current rates of tax for different Equity instruments are as follows:
Different taxes in Equity Investment

How does STT affect a mutual fund investor while selling his units?

As mentioned above STT is charged on the entire investment value on the sale of units of Equity based Mutual Funds to the mutual fund i.e., it is payable by the investor who is redeeming his units. Although it is borne by the investor, it is paid by the mutual fund AMC on behalf of the investor. So what the investor receives on the sale (redemption) of the equity based mutual fund units he holds, is the amount after paying for the STT.(Read when to exit an equity mutual fund investment)

While redeeming units of Equity based Mutual Fund an investor can either request for sale of units or can request for receiving a fixed amount of money by selling proportionate number of units.

So, if an investor asks for sale of 100 units @ Rs.200 each (NAV-understanding basics of mutual funds) from his Equity Mutual Fund investment , the AMC sells his units back to the mutual fund scheme and an STT is charged on Rs.20,000 and the amount after STT deduction is passed on to the investor.

On the other hand if an investor requests to receive say Rs. 10,000 of his Equity Mutual Fund investment (i.e., 50 units @ Rs. 200 each) the AMC would add up the STT amount to the Rs. 10,000 and then assess how many units in total need to be sold to arrive at a net value of Rs. 20,000. So, it is up to an investor to decide if he needs a specific amount in hand or just sell his units to receive whatever its value is. (Read 20 things to consider while investing in mutual fund)

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