The STT exercise trap
How Securities Transaction Tax is charged when an in-the-money option is exercised at expiry, how that changed since 2016, and what still catches traders out.
STT on options is charged in two different ways. When you sell an option, it is a percentage of the premium. When a long option is still in the money at expiry, the exchange exercises it automatically and STT is charged at the exercise rate on its intrinsic value instead (the amount it is in the money, times the quantity).
STT on a long call that ends 50 points in the money (one NIFTY lot)
| Period | Sale rate | Exercise rate (on) | Sell at the close | Let it be exercised |
|---|---|---|---|---|
| Jun 2016 – Aug 2019 | 0.05% of premium | 0.125% (settlement value) | ₹1.63 | ₹2,035.31 |
| Sep 2019 – Mar 2023 | 0.05% of premium | 0.125% (intrinsic value) | ₹1.63 | ₹4.06 |
| Apr 2023 – Sep 2024 | 0.0625% of premium | 0.125% (intrinsic value) | ₹2.03 | ₹4.06 |
| Oct 2024 – Mar 2026 | 0.1% of premium | 0.125% (intrinsic value) | ₹3.25 | ₹4.06 |
| From Apr 2026 | 0.15% of premium | 0.15% (intrinsic value) | ₹4.88 | ₹4.88 |
The trap was at its worst before September 2019, when exercise STT was charged on the full settlement value (the index level times the quantity) rather than on the intrinsic value. A call that finished a few points in the money could owe more STT than it was worth.
Today, in Arthfy's cost model, the exercise rate and the sale rate are both 0.15% (from 1 April 2026), and on expiry day an in-the-money option trades close to its intrinsic value. For index options, letting it expire in the money now costs about the same STT as selling it at the close. Between October 2024 and March 2026 the exercise rate (0.125%) was above the sale rate (0.10%), and before October 2024 it was at least double.
- Stock options are different: an in-the-money stock option at expiry is settled by delivering the shares, which is taxed and margined like a delivery trade on the full value. Many brokers close such positions in expiry week for that reason.
- Some brokers charge a fee on exercise or on physical settlement; check your broker's schedule.
- Selling a deep in-the-money option in the last minutes can cost more in bid-ask spread than the STT difference.
Live: the exercise STT on a NIFTY at-the-money call
Runs on today's NIFTY chain with Arthfy's pre-trade check. Free with an Arthfy account.
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