But only people who engage in intraday trading with stocks can add STT to their share acquisition cost to reduce their capital gains tax. Regular stock market investors can’t take advantage of this. So, the next question is who qualifies as a taxpayer investor or a trader in stock market transactions?
Keep reading to find out which taxpayers can use STT to lower their capital gains tax burden and which one should avoid it altogether.
What is Securities Transaction Tax (STT)?
Securities Transaction Tax (STT) is a statutory levy imposed by the central government on the purchase and sale of securities listed on recognized stock exchanges in India. STT is typically payable at the time of sale and at the time of purchase as well.
How to use Securities Transaction Tax (STT) to reduce net capital gains tax liability?
First know how the tax department interprets an equity transaction:
- Equity intraday trade: Buy and sell equities on the same day.
- Equity delivery trade: Buy equities on Day 1 and keep it in demat account for some days and then sell
Vishwas Panjiar, Partner, Nangia Andersen LLP, says: “Equity intraday trades are the buying and selling of stocks within the same trading day without actual delivery of such stocks. Such intraday transactions are fundamentally speculative in nature and gains/losses arising therefrom are typically considered as business income/loss rather than capital gain. Consequently, being business in nature, a taxpayer is allowed to claim deduction of Securities Transaction Tax (STT) paid as a normal business expense while computing his/her taxable income.”
Chartered Accountant (Dr.) Suresh Surana agrees with Panjiar and adds: “Section 36(1)(xv) of the Income Tax Act, 1961 provides that allows a deduction for the STT paid by the taxpayer in respect of taxable securities transactions, provided such transactions are entered into in the course of the taxpayer’s business, and the income from such transactions is included in the computation of business income.”
Table showing how to STT can be used to reduce capital gains tax liability:
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Source: CA (Dr.) Suresh Surana
Which taxpayers should not use STT to reduce their capital gains tax liability?
In equity delivery-based trades, you buy the shares and hold them in your demat account for long-term capital appreciation and not for speculative purposes as equity intraday trade. This is the reason why such equity delivery transactions are of capital assets nature and not business assets.
Chartered Accountant (Dr.) Suresh Surana, explains: “In the case of equity delivery trades where investors buy and hold shares for delivery into their demat account, the calculation of capital gains upon sale involves deducting the cost of acquisition and certain allowable expenses from the sale proceeds.”
Surana explains: “In accordance with 7th proviso of Section 48, which governs the computation of capital gains, STT is not permitted to be included in the cost of acquisition or as part of the expenses incurred in connection with the transfer of the capital asset. While transaction-related charges such as brokerage and stamp duty may be considered for such purposes, STT has been specifically excluded from such treatment.”
Can you get a tax notice for claiming STT on equity delivery trades to reduce net capital gains tax outgo?
According to Surana: “Taxpayers can receive a notice from the Income Tax Department if they incorrectly claim Securities Transaction Tax (STT) as part of the cost of acquisition while computing capital gains on equity delivery-based trades, thereby reducing their taxable capital gains.”
Surana says including STT in such computation of equity delivery transactions is treated as an incorrect claim and may be flagged by the department either during automated processing (under Section 143(1)) or during scrutiny assessment.
Surana adds: “The tax authorities often compare ITR disclosures with third-party data, including broker statements, Annual Information Statements (AIS), and Capital Gains reports. If a mismatch is detected such as inflated cost of acquisition or underreported gains, a notice may be issued to the taxpayer seeking explanation, rectification, or justification for the computation. Such discrepancies, if found to be deliberate or repeated, could potentially lead to:
- Demand notices for additional tax liability
- Interest under Sections 234B/234C
- Penalty for under-reporting or misreporting of income under Section 270A
Surana adds: “Incorrectly including STT in the cost of acquisition for equity delivery trades is not allowed, and doing so may invite potential litigation or notice from the tax authorities.”
Panjiar says such tax notices do not discriminate against a small amount or big amount of money, it’s sent irrespective of the quantum involved.
Panjiar explains: “Since claiming deduction of STT is not permitted in case of delivery-based transaction, the manner of computing capital gains adopted by the taxpayer would be erroneous and violative of the express computation mechanism prescribed by the Income-tax Act, 1961 in such cases. Further, the income tax department has been using algorithms and data from multiple sources to detect inaccurate/fraudulent claims made by a taxpayer. Thus, it is likely that even minor cases should get flagged by the tax department’s internal system. However, whether or not the tax department issues notice to taxpayers in all such cases (irrespective of the quantum involved) is entirely the prerogative of the tax department.”