Mechanics · Lesson 02 of 4 · Concept
STT on exercised options
When an option is sold or squared off, Securities Transaction Tax applies to the premium. When an in-the-money option is allowed to expire and is exercised, it applies to the settlement value instead — a much larger base. On a barely in-the-money contract the charge can exceed the gain.
Securities Transaction Act charge structure for exercised options
Two different bases
Squaring off an option is a sale, and the tax is charged on the premium — a small base, because premiums are small relative to contract values.
Letting an in-the-money option expire is an exercise, and the charge moves to the settlement value of the contract. That base is the strike multiplied by the lot size, which for an index contract is orders of magnitude larger than any premium.
The rate applied to an exercise is lower than the rate on a sale, which is what makes the trap work: the smaller rate on the much larger base still produces the bigger number.
Why it surprises people
The arithmetic only turns bad in one specific place — a contract that finishes barely in the money. There the intrinsic value is small, so the gain is small, while the settlement value the charge is computed on is full size.
A contract that finishes deep in the money has a gain large enough to absorb the charge comfortably. One that finishes out of the money is never exercised and attracts nothing. It is the narrow band just inside the strike where a profitable position can end up costing money.
The remedy is procedural rather than clever: square off an in-the-money option before the close rather than letting it be exercised. That converts the base back to the premium.
Rates and the precise charge structure are set by statute and change from time to time. They are deliberately not quoted here, because a hard-coded rate would go stale silently — your broker’s contract note carries the figure that actually applied.
On NIFTY’s 22 September 2026 expiry the 23,300 call settled at ₹29.00 with the index at 23,329. A position that finishes 29 points in the money has ₹29 of intrinsic value per unit and a settlement value computed on 23,300 — which is the shape of contract this charge is worst on.
Common questions
Why is STT so high on expired options?
Because an exercised in-the-money option is charged on the settlement value of the contract rather than on the premium. The rate is lower than on a sale, but the base is far larger, so the total can exceed the gain on a barely in-the-money contract.
How do you avoid STT on exercise?
Square off the position before the close on expiry day instead of letting it be exercised. A sale is charged on the premium; an exercise is charged on the settlement value.
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