Traders in financial markets frequently face numerous expenses in the course of their business. Knowing which costs are eligible for tax claims is vital for effective financial management and compliance with tax regulations.
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 about business and professional income. Below is a list of expenses 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 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 business expense.
- Office Supplies – Expenses such as stationery expenses, printing expenses, tea and coffee expenses, etc. 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 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 purposes, 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 an 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 40%. Hence, you can claim 4 lakhs as depreciation in the 1st year (10,00,000*40%) and can carry forward the remaining amount of INR 6 lakhs 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 purposes.
- Finance Costs – If you take a loan for your trading business, you can claim interest on the loan as a deductible expense.
- Trading Expenses – All charges and expenses that the trader pays for trading, he can claim as 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?
- STT – Securities Transaction Tax is the tax that the 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 they report such income as a business income.
- CTT – Commodities Transaction Tax is the tax on trading in commodities. The trader can claim CTT paid as a valid business expense.
- Input GST – CGST, SGST, and 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 an Income Tax Return
- Personal Expenses – An expense incurred for personal purposes is not income tax deductible.
- Fines & Penalties – Explanation 1 of Section 37 of the Income Tax Act prohibits the taxpayer from claiming any expense as a business expense if it is an offense or is prohibited by law. 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. The Margin Penalty paid to the broker/stock exchange is a deductible business expense.
- Tax – Any form of tax paid on the income earned is not deductible as an expense. Examples: Income Tax, Advance Tax, GST, etc.
- Cash Payment – The taxpayer cannot claim an expense that he pays in cash for an amount exceeding INR 10,000. 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 FY.
- If a trader incurs an expense for both personal and business purposes, they 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. Also, If the Income Tax Department issues a notice, these proofs justify the expenses claimed.
- The trader should not pay expenses in cash. The cash payment made to a single person in a day should not exceed INR 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.
- If the income from business or profession is more than INR 1,50,000 or the total sales or gross receipts are more than INR 25 lacs in any of the preceding 3 years, then you must maintain books of accounts.
- 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.
Which expenses can a trader claim on the 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 ITR. Such expenses are deductible only to calculate the Capital Gains. However, the Securities Transaction Tax (STT) is not allowed as a deductible expense against capital gains as per the announcement in Budget 2008.
FAQs
Under the New Regime, you can claim all trading expenses. Business expenses are allowable under both regimes.
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.
In Budget 2008, the Finance Minister removed the rebate that had earlier allowed STT as a deduction from tax payments. Instead, the Finance Minister allowed claiming STT as a business expense. Furthermore, the clarification stated that STT would only be allowed as an expense if the income is classified as business income rather than capital gains.
Yes, we can claim it as a business expense if it is directly related to the business.
Hi @Saurabh_Ghosh
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.
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.
Thanks for the reply!
So what i understood file gst for gst itc and remaining file itr for 100% benefit of expenses.
So which is better practice to do,
Have gst and file both gst and itr or just simply file itr no need of gst.
I mean which gives complete benefit for expenses.
@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.
@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.
@Saurabh_Ghosh,
Right.
Also, since Capital Market traders are not required to have GST registration.
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
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.
@Saurabh_Ghosh,
The duration within which you have to invest the realized capital gains and the deduction amount differs based on sections.
You can find all the details in this article
@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
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