Securities Transaction Tax (STT) on Options

STT is levied on the sell side of an options trade, and separately — often overlooked by newer traders — on the exercise of an option that expires in-the-money, calculated on the full intrinsic value at settlement rather than just the premium. That STT-on-exercise charge has occasionally been large enough to turn a barely-ITM position into a net loss after costs, which is why closing a position manually before expiry rather than letting a thin ITM strike auto-exercise is common practice among active traders. Rates change by government notification, so check the current schedule with your broker rather than trusting a fixed number here.

Because the tax applies at exercise regardless of how thin the ITM margin is, many trading desks build automatic square-off logic for positions finishing only marginally in the money — specifically to avoid an exercise-triggered STT bill eating more value than the position's own residual profit.

Example: an option finishing even ₹1 ITM still triggers STT on the entire intrinsic value at exercise — on a large lot size, that single charge can be enough on its own to turn a marginal, barely-profitable ITM finish into a net loss once every cost is added up.