Classify the underlying transaction first
For FY 2025–26 and AY 2026–27, section 36(1)(xv) of the Income-tax Act, 1961 permits deduction of securities transaction tax (STT) paid on taxable securities transactions entered into in the course of the taxpayer's business during the previous year, where the resulting income is included under profits and gains of business or profession. Section 48 prohibits STT deduction in computing capital gains. The tax on a contract note is not itself evidence of the correct income head.
Read the applicable text: Income-tax Act, 1961, sections 36(1)(xv) and 48 Notified AY 2026–27 ITR-6 ITR-6 corrigendum Official return utility, schema and validation rules.
Match execution, settlement and tax
Retain the broker contract note, exchange trade reference and settlement evidence. Reconcile paid STT separately from brokerage, exchange charges, GST and other amounts. Where trading and investment portfolios coexist, allocate by lot or trade rather than by aggregate broker turnover. Trace cancellations or reversals so the amount paid for eligible business trades is supported.
Reconcile the notified return without subtracting the same amount twice
If eligible business STT is already deducted in the profit starting point, no second deduction is required. The AY 2026–27 ITR-6 identifies STT on transactions whose income is not included in business income at Part A-OI item 6p. For any debit that fails a different condition, such as lack of verified payment, determine and document the applicable field separately instead of assuming item 6p covers it. The section 36 total at 6s flows to Schedule BP A item 14. Trace the specific reporting line for the amount already debited where applicable. If an amount has already been eliminated when separating income and expenses by head, check the bridge so it is not added back again. Compute Schedule CG without deducting STT as an acquisition cost or transfer expense, including when the broker shows the sale proceeds net of STT. Separately test whether brokerage and other amounts meet section 48’s conditions.
Keep head classification and rate tests separate
Document the consistent treatment of holdings, including facts supporting any distinction between trading stock and investments. This guide deals with the deduction and reconciliation; test capital-gains rates, holding period and any special STT-related eligibility conditions separately. Do not use those conditions as permission to deduct STT from gains.
Six worked illustrations
All facts and amounts are fictional. Calculations illustrate the stated assumptions, not a predetermined legal outcome.
Illustrative example 1: Trading expense already booked
Trading result before STT is ₹48 lakh and eligible paid STT of ₹3 lakh is already expensed. The resulting business amount is ₹45 lakh before other adjustments. Deducting ₹3 lakh again would understate it by ₹3 lakh.
Illustrative example 2: Capital gain excluding STT
Assume ₹30 lakh consideration, ₹20 lakh supported cost and ₹0.5 lakh other allowable transfer expense. With ₹0.2 lakh STT excluded, gain is ₹9.5 lakh before any other applicable adjustment.
Illustrative example 3: Mixed broker ledger
A broker ledger shows ₹2.4 lakh STT on eligible business trades and ₹0.9 lakh on investments. The total is ₹3.3 lakh. On the assumed facts only ₹2.4 lakh is eligible under section 36(1)(xv).
Illustrative example 4: Mixed brokerage and STT
An investment sale settlement shows ₹0.4 lakh allowable brokerage and ₹0.15 lakh STT, with ₹5 lakh gain before those charges. The gain after brokerage is ₹4.6 lakh; the ₹0.15 lakh does not reduce it.
Illustrative example 5: Part of a debit lacks payment evidence
A ₹1.8 lakh business ledger debit includes ₹1.5 lakh supported as paid on qualifying transactions and ₹0.3 lakh without verified payment. Only ₹1.5 lakh is supported for the deduction. If the full ₹1.8 lakh reduced starting profit, reverse the unsupported ₹0.3 lakh once in the tax computation.
Illustrative example 6: Detect a repeated addition
A ₹0.75 lakh investment STT debit has been removed from business profit once. Repeating it as a second adjustment would make ₹1.5 lakh of adjustments instead of ₹0.75 lakh. Trace the utility's final output back to one elimination.
Ten-step verification table
| Step | Action | Evidence |
|---|---|---|
| 1 | Separate portfolio classifications | Head-of-income working |
| 2 | Identify all executed trades | Broker and exchange trade detail |
| 3 | Split charges by type | Contract note reconciliation |
| 4 | Verify paid STT | Settlement and payment trail |
| 5 | Allocate to business or investment | Trade and lot identifiers |
| 6 | Check prior booking in profit | General ledger bridge |
| 7 | Verify eligible business deduction | Section 36(1)(xv) analysis |
| 8 | Trace ineligible debits once | Part A-OI and Schedule BP working |
| 9 | Compute gains excluding STT | Section 48 and Schedule CG calculation |
| 10 | Review the filed computation | Reconciled utility output |
Sixteen practitioner FAQs
1. Is all STT deductible?
Only the eligible business amount under the stated provision.
2. Can investment STT enter the acquisition cost for gains?
No. Section 48 excludes a deduction for STT in the capital-gains computation.
3. Can the same company have both income heads?
Assess the facts and support the split.
4. Does the contract note settle head classification?
No. Establish the nature of the underlying holdings and activity.
5. Can STT be deducted twice when already expensed?
No. Reconcile it to the starting profit.
6. Can brokerage be treated as STT?
No. Verify separate categories and eligibility.
7. What evidence shows the amount paid?
Use the settlement and broker records together.
8. Does book classification control tax automatically?
No. Support the tax treatment independently.
9. Which OI field identifies non-business STT?
For the stated AY review item 6p.
10. Where does the section 36 disallowance total flow?
Part A-OI 6s feeds Schedule BP A item 14.
11. How do I check duplication across income heads?
Follow each debit through the head-separation and final return calculation.
12. What if a contract note is cancelled?
Trace the reversal and actual amount paid.
13. Is the size of the charge a proxy for eligibility?
No. Match it to the underlying qualifying transaction.
14. Does this guide calculate the capital-gains tax rate?
No. Test holding period, rates and eligibility separately.
15. Should all broker expenses be allocated in one ratio?
Use trade-specific evidence where available and support any allocation.
16. What is the final control?
A trade-level split with tax, expenses and both income heads reconciled.
Official sources
Income-tax Act, 1961, sections 36(1)(xv) and 48 Notified AY 2026–27 ITR-6 ITR-6 corrigendum Official return utility, schema and validation rules