Securities Transaction Tax (STT) is a tax levied on the purchase and sale of securities such as stocks, equity mutual funds, and derivatives in India. The question arises whether this tax is considered an allowable expense for tax purposes under the Income Tax Act, particularly when computing your capital gains tax or business income.
In this blog, we will explore the treatment of STT in different contexts to help you understand how it impacts your tax filing.
STT and Capital Gains Tax
For individuals who invest in the stock market, STT is a transaction-based tax. It is levied on the buying and selling of securities and is usually deducted at the time of the transaction by the stock exchange or the broker.
Now, let's address whether STT is allowable as an expense under the capital gains head:
STT and Capital Gains Taxation
Short-Term Capital Gains (STCG): If you sell equity shares or equity mutual funds within one year, the STCG tax is levied at 15% (plus applicable cess) on the profit. However, STT is not deducted from your final capital gains tax calculation; instead, it is paid upfront when the transaction occurs.
Long-Term Capital Gains (LTCG): For holdings exceeding one year, LTCG tax is levied at 10% (on gains above ₹1 lakh). STT is also paid when you sell the securities, but it is not considered part of your capital gains tax computation.
Can STT Be Claimed as an Expense?
No, STT cannot be claimed as an expense under the capital gains section. It is a transaction tax and is not considered a deductible expense when calculating either STCG or LTCG.
However, if the STT was paid on the sale of a security, it is already accounted for in the cost of acquisition for LTCG purposes, and this reduces the amount of capital gain realized.
STT paid at the time of trading is not deductible separately from the capital gains tax calculation.
STT and Business Income (For Traders in Securities)
If you're a trader in securities (i.e., you're not investing for long-term capital gains but instead buying and selling securities regularly), the income from such transactions is categorized as business income rather than capital gains. The treatment of STT in such cases is different.
STT as a Business Expense
If you're trading in securities, the profits from these transactions are considered business income, and you can report it under Profits and Gains of Business or Profession (PGBP).
Expenses related to your trading activity, including brokerage fees, trading platform charges, and even certain other costs incurred to carry out the trading business, are deductible.
But STT on the purchase and sale of securities is not considered a direct business expense under the Income Tax Act for traders. It is treated as part of the cost of acquisition and sale but does not qualify as a business expense that can be deducted from business income.
Can STT Be Set Off Against Income?
The most common way STT impacts your overall tax liability is in relation to capital gains. As previously mentioned, it is deducted from the sale price, reducing the overall capital gains that will be taxed. However, STT cannot be offset against other sources of income (like salary income or rental income).
If you're a trader in securities and report the profits as business income, STT paid will be accounted for as part of the overall transaction cost, but it still cannot be deducted as a business expense for tax purposes.
What Happens If STT Is Deducted Incorrectly?
If there is an error in the deduction of STT or if the tax is incorrectly applied to a transaction that does not fall under the purview of taxable securities transactions, you should:
Contact Your Broker: Reach out to your broker to check the details of the transaction. Mistakes can happen during the process, and your broker or the stock exchange may be able to rectify the issue.
Seek Clarification from the Income Tax Department: If you believe STT has been wrongly levied or deducted, you can approach the Income Tax Department for clarification or to challenge the deduction.
However, as mentioned earlier, STT is not refundable and cannot be adjusted against other taxes or carried forward.
Conclusion
While Securities Transaction Tax (STT) is a necessary cost for those engaged in buying and selling securities in India, it is not considered an allowable business expense or deductible cost under the Income Tax Act when computing either capital gains or business income.
For Investors: STT reduces the overall capital gain amount, but it is not deductible from your capital gains tax.
For Traders: STT is treated as part of the cost of acquisition and sale but is not a deductible business expense.
Investors and traders need to factor in STT when assessing their overall returns from securities transactions. Even though you cannot claim STT as a deduction, it is important to keep track of all such taxes paid while filing your Income Tax Returns (ITR) to ensure compliance with tax regulations and optimize your overall tax position.
If you're unsure about how STT is impacting your taxes or need assistance with reporting your income from securities trading, consulting a tax expert can be a helpful step in ensuring that you comply with the rules and maximize your tax savings.
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