What Expenses Can a Trader claim in Income Tax Return?

Expenses a Trader can Claim

A trader can claim all the expenses directly connected to the trading business as a business expense. The expenses incurred should be wholly and exclusively in relation to business and professional income. Below is a list of expense that a trader can claim against trading income.

  • Rent Expense – If the trader has an office on rented premises, he can claim the rent paid as a valid expense. Further, he must save the rent receipts and rent agreement as valid proof.
  • Insurance Expense – Traders can claim insurance expenses on assets used for business purposes.
  • Repairs & Maintenance – The trader can claim expenses paid for repairs of the laptop, furniture, or any other equipment for business purposes as a valid business expense.
  • Office Supplies – Expenses such as stationery expense, printing expense, tea coffee expense, etc. is a valid income tax deductible.
  • Electricity Expense – The trader can claim electricity expense for the office as a business expense. If they are working from home, they can claim electricity expenses proportionally.
  • Membership Fees– If you pay any membership fee for a trading platform or for a platform related to trading, you can claim it as a business expense. For example, a trader can claim the membership fee paid for becoming a member of the trader’s club. However, if he pays the membership fees of a golf club for his recreational purpose, he cannot claim such expense.
  • Legal & Professional Fees– Any fee paid to a professional for their services is a valid income tax deductible. This includes tax return filing, tax audit, legal advice, consultancy services, etc.
  • Books & Subscriptions – If a trader pays for subscriptions to magazines or purchased books related to trading, he can claim it as a valid expense.
  • Depreciation – It means claiming the cost of the asset as an expense over the life of the asset. As per the Income Tax 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 INR 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 of INR 4 lacs to future years.
  • Mobile & Internet Expense – Traders can claim expenses incurred to pay mobile bills, telephone bills, and internet charges. It is deductible if the expense is incurred for business purpose.
  • Finance Costs – If you take a loan for your trading business, you can claim interest on loan as deductible expense.
  • Trading Expenses – All charges and expenses that the trader pays for the purpose of trading, he can claim as valid business expenses. This includes Brokerage, Turnover Fees, Clearing Charges, Exchange Transaction Charges, STT, Stamp Duty, GST, etc.
  • Other Business Expenses – The trader can claim any other expense that is directly related to the trading business.

Can I claim Tax paid as a Business Expense?

  • STTSecurities Transaction Tax is the tax that trader pays 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.
  • CTTCommodities Transaction Tax is the tax on trading in commodities. The trader can claim CTT paid as a valid business expense.
  • Input GSTCGST, SGST, IGST paid on trading expenses are deductible as a valid business expense if the trader does not have a GST Registration. If the trader has a GST registration, they can claim the credit of Input GST against Output GST.
  • Tax on Income – The trader cannot claim the tax on income such as Income Tax or tax on sales such as GST as a business expense.

Expenses that a Trader cannot claim in Income Tax Return

  • Personal Expenses – An expense incurred for personal purposes is not income tax deductible.
  • Fines & Penalties – As per Explanation 1 of Section  37 of the Income Tax Act, the taxpayer cannot claim any expense that is an offense or is prohibited by law as a business expense. For example, a taxpayer cannot claim Interest on late filing of ITR. The penalty for breach of a contract is deductible but the penalty for breach of the provision of law is not income tax deductible. Margin Penalty paid to broker/stock exchange is a deductible business expense.
  • 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 – The taxpayer cannot claim an expense that he pays in cash for an amount exceeding INR 20,000. 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, and 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 purposes, he/she can claim a reasonable portion towards business.
  • The trader should preserve the bills, invoices, or any other proof 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 u/s 80C, medical insurance premium u/s 80D, interest on an educational loan u/s 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 INR 25 lacs in any of the preceding 3 years, then you must maintain books of accounts to 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 need not 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 turnover and determine the applicability of Tax Audit to file ITR.

Check Tax Audit Applicability u/s 44AB
Check Income Tax Audit applicability u/s 44AB to file Tax Audit Report Form 3CB - 3CD with your Income Tax Return.
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Check Tax Audit Applicability u/s 44AB
Check Income Tax Audit applicability u/s 44AB to file Tax Audit Report Form 3CB - 3CD with your Income Tax Return.
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Which expenses can a trader claim on sale of shares?

Income from sale of shares is taxable under the head Income from Capital Gains. An investor or trader can deduct the expenses which are wholly and exclusively incurred on the transfer of shares, from the sales consideration. Thus, a trader or investor can claim expenses such as brokerage, stamp duty, sales commission, etc. in the Income Tax Return. Such expenses are deductible only for the purpose of calculating the Capital Gains. However, Securities Transaction Tax (STT) is not allowed as a deductible expense against capital gains as per the announcement in Budget 2008.

FAQs

Can I claim GST paid as a business expense?

If a business is not registered under GST, it can claim CGST, SGST and IGST paid on expenses as a valid business expense. However, if the business has a GST Registration, they can claim the credit of Input GST paid on expenses against the Output GST collected on sales. Since they are claiming the credit, they cannot claim the GST paid as an expense again.

Can I claim a margin penalty as a business expense?

A margin Penalty is a penalty levied on trades performed without sufficient margin. Margin penalty paid to the stock exchange/broker is not an infringement of law. Thus, it does not violate Explanation 1 of Sec 37 and is deductible as a business expense.

Will STT be treated as tax paid or as an expense?

STT was earlier allowed as a rebate from the tax payment. However, in Budget 2008, the Finance Minister removed the rebate and allowed STT to be claimed as a business expense. Further, it was clarified that the STT would be allowed as an expense only if the income is considered as a business income and not capital gains.

Got Questions? Ask Away!

  1. Hi @Saurabh_Ghosh

    1. The treatment of income from the trading activity will remain the same irrespective of company account or individual account. They are classified under the same income heads such as capital gains or business/profession and taxes are calculated accordingly.
      If your turnover is less INR 400 cr then the Income Tax slab rate is 25% for companies. For Individuals, the income tax liability is taxed at the applicable slab rates.
    1. To claim GST ITC, you need to have a GST registration and need to file a GST return. However, when filing your Income Tax Return, you can claim expenses directly related to your trading activity like electricity bills, internet expenses, etc.
      Keep in mind, if you are claiming GST ITC you cannot claim the GST amount in your expense.
      For eg: if the electricity bill is INR 1180 (180 being GST), and you are claiming the ITC on INR 180, you claim only INR 1000 as an expense when filing your ITR. In case you do not have GST registration, you can claim the total of INR 1180 when filing the ITR.
  2. @Saurabh_Ghosh,

    The GST Act specifically excludes Securities from the definition of Goods. So there is no requirement for traders to have GST registration.
    The GST paid on trading expenses such as brokerage, transaction costs, turnover fees, etc can still be claimed as an expense when filing the ITR.

  3. @Saurabh_Ghosh

    Since GST ITC claimed can only be used when you have GST liability. So it might make sense for a trader to claim ITC along with other expenses when filing the ITR.

    However, if you have GST payable then you can claim the ITC credit against that liability.

  4. @Saurabh_Ghosh,

    Right.
    Also, since Capital Market traders are not required to have GST registration.

  5. Hi @nishant_khemani,

    You can drop your contact details on our contact us page so our team can get in touch with you to understand your requirements, tell you more about the process, pricing and discounts

  6. Hi @Saurabh_Ghosh,

    Unlike, F&O and intraday trading which are classified as business activity for income tax purposes, you cannot claim expenses like brokerage, internet expenses, legal and professional fees, etc for short-term and long-term capital gains. But an investor can claim, any transfer expenses except STT like brokerage, stamp duty, etc for capital gains, when filing ITR.

    However, the Income Tax Act has defined the particular sections under which exemptions can be claimed on capital gains earned. The intention of the exemption is to allow the taxpayer to invest in a new Capital Asset within a specified time limit without any tax burden.

  7. @Saurabh_Ghosh,

    There has always been this question and a debate around the treatment of gains from equity shares as business income or capital gains.
    The answer is derived from the taxpayer’s intent of the transaction. Here’s an article discussing when to treat the sale of shares as Capital Gains or Business Income

  8. Hi @Saurabh_Ghosh

    As per the clarification issued by CBDT, it is at the discretion of the assessee to treat Equity share trading as Business Income or Capital Gains.
    The only condition is to follow the same method continuously in subsequent years as well. The taxpayer shall not be allowed to adopt a contrary approach in subsequent years.

    After filing of ITR, you just need to wait for IT Department to process your ITR. You don’t need to give any confirmation letters or documents. However, if the IT Department asks for any clarifications, in that case, you need to submit a response by mentioning your intent and reasoning for the treatment.

    Hope this helps

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