A trader can claim all the expenses directly connected to the trading income as a deductible. The expenses incurred should be wholly and exclusively in relation to business and professional income. Therefore, these expenses include business expenses such as:
- Rent Expense – If the trader has an office in rented premises, you can claim the rent paid as a valid expense. Hence, you must save the rent receipts and rent agreement for future references.
- Insurance Expense – You can claim insurance expenses on assets used for business purposes.
- Repairs & Maintenance – Expense paid for repairs of the laptop, furniture, or any other equipment for business purposes are deductible.
- Office Supplies – Expense like stationery expense, printing expense, tea coffee expenses, etc. is a valid deductible.
- Electricity Expense – Electricity Expense for office claimed as an expense is deductible. If you are working from home, you can claim electricity expenses proportionally.
- Membership Fees– If you pay any membership fee for a trading platform or for a platform related to trading, it is deductible. For example, a trader can claim the membership fee paid for becoming a member of the trader’s club. However, if he pays membership fees of a golf club for his recreational purpose, it cannot be claimed
- Legal & Professional Fees– Any fee paid to a professional for their services is deductible as a valid expense. This includes tax return filing, tax audit, legal advice, consultancy services, etc.
- Books & Subscriptions – If a trader pays for subscriptions of magazines or purchased books related to trading, it is deductible.
- Depreciation – It means claiming the cost of the asset as expense over the life of the asset. As per the IT Act, we cannot claim the cost of the asset as an expense; however, you can claim the depreciation on the asset as an expense. For example, You have purchased a high-end computer for Rs 10 lakhs. The depreciation rate is 60%. Hence, you can claim 6 lakhs as depreciation in the 1st year (10,00,000*60%). And can carry forward the remaining amount to next year.
- Mobile & Internet Expense – Expense incurred to pay mobile bills, telephone bills and internet charges can be claimed. It is deductible if the expense if it is for business purpose.
- Finance Costs – If you take a loan for your trading business, you can claim interest paid on such a loan as a deductible expense.
- Trading Expenses – All charges and expenses paid for the purpose of trading are deductible. This includes Brokerage, Turnover Fees, Clearing Charges, Exchange Transaction Charges, STT, Stamp Duty, GST, etc.
- Other Business Expenses – Any other expense that is directly related to your trading business can be claimed as a valid expense
Can I claim Tax paid as Business Expense?
- STT – Securities Transaction Tax is paid on trading in securities i.e. equity shares, equity mutual funds, ETFs, equity futures, equity options, etc. The trader can claim STT paid as a valid business expense if he/she reports such income as a business income
- Stamp Duty – Stamp Duty is an expense on the transfer of securities. Therefore, the trader can claim Stamp Duty paid as a valid business expense if he/she reports such income as a business income
- CTT – Commodities Transaction Tax is on trading in commodities. The trader can claim CTT paid as a valid business expense
- Input GST – CGST, SGST, IGST is on trading expenses is deductible as a valid business expense. Only if is the trader has no GST registration. If the trader has registration under GST, they can claim the credit of Input GST against Output GST. Hence, they are not allowed double deductions.
- Tax on Income – Tax paid on income such as Income Tax or tax paid on sales such as GST cannot be claimed as a business expense
Note: Trader having income they classify Capital Gains cannot claim any trading expense except Brokerage. This can happen in the case of traders investing in equity delivery and mutual funds.
Expenses which a Trader cannot claim in Income Tax Return
- Personal Expenses – An expense incurred for personal purposes is not deductible.
- Fines & Penalties – The non-compliance or delay in compliance attracts interest and penal consequences. Hence, interest, fine, late fee, penalty, etc. are not a valid deductible.
- Tax – Any form of Tax paid on the income earned is not deductible as an expense. For example Income Tax, Advance Tax, GST etc
- Cash Payment – If an expense has been paid in cash for an amount exceeding Rs. 20,000, it cannot be claimed as an expense. Additionally, there are exceptions to this mentioned under rule 6DD of the Indian Income Tax Act
- TDS not deposited – If tax is not deducted at source or not deposited, then such expense is not deductible. These expenses include interest, commission, rent, royalty, professional or technical fees paid or payable to any person in India.
Points to remember for Trader who claims Business Expenses
- The invoice should be in the name of the trader and the invoice date should fall in the relevant financial year
- If a trader incurs an expense for both personal and business purpose, he/she should claim a reasonable portion towards business
- The trader should preserve the bills, invoices, or any other proofs of the payments made. You need to submit proofs during the process of Tax Audit by a Chartered Accountant. If the Income Tax Department issues a notice, these proofs justify expenses claimed.
- If a trader uses some specified services, he/she should deduct TDS as per the applicable TDS section. For example, Mr. X, a trader obtained the services of a professional CA for auditing his books of accounts and filing ITR. Mr. X should deduct TDS u/s 194J on making payment to the Chartered Accountant. He should deposit the TDS and file TDS Return Form 26Q
- The trader should not pay expenses in cash. The cash payment made to a single person in a day should not exceed Rs. 10,000. Thus, pay expenses using modes other than cash
- While calculating Income Tax on trading, the trader can claim deductions under chapter VI-A. This includes LIC premium (80C), medical insurance premium (80D), interest on an educational loan (80E), etc.
- If the income from business or profession is more than Rs.1,50,000 or the total sales or gross receipts is more than Rs.25 lacs in any of the preceding 3 years, then you must maintain books of accounts which can help the Assessing Officer to calculate the taxable income as per the Income Tax Act
- If a trader opts for Presumptive Scheme u/s 44AD, they cannot claim expenses. This is because they are not required to maintain books of accounts.
A trader having Business Income should claim valid business expenses in the P&L Statement. They also need to prepare financial statements and file ITR-3. The trader also needs to calculate the trading T/O and determine the applicability of Tax Audit to file ITR.
CGST, SGST, IGST paid on expenses is deductible as a valid business expense only if is the business has no GST Registration. If the business is registered under GST, they can claim the credit of Input GST against Output GST. Hence, they are not allowed double deductions. Thus, they cannot claim GST paid as a business expense.