Deduction of Purchase Cost of Equity Shares While Computing Business Income

I was reading up on Varsity regarding the option available to traders to elect to show their equity delivery based investments as business income and I am also aware that if such an option is taken it has to be consistently followed in future. Varsity mentions that STT and other charges can be deducted while computing you net business income but I saw no mention of the the cost of the purchase of the shares itself. Don’t we deduct the cost of the shares purchased itself while arriving at the business income. Especially considering that the fact the guidance note issued by ICAI requires turnover for equity delivery transactions declared as business income to be computed as the Sales Value of the Share.
My question simply remains don’t we also deduct the cost from the sales value to arrive at business income besides other charges like STT etc?

P.S My apologies if my question seems too naive.

STT & other costs get rebate

So you mean to say that only STT and other charges can deducted and the cost of purchase of the shares cannot be deducted from turnover while computing taxable income?
I’m given to understand that Bracket Order is an Intraday product with a different turnover calculation mechanism ( absolute total of positive and negative differences) . My specific question relates to delivery based equity trades where one chooses to show them as business income thus reporting sales as turnover

If you are going to classify your transactions in securities as those in the course of business, the taxable income will be the sale consideration as reduced by cost of acquisition and all related expenses.

It is only for the purpose of determining turnover, specific guidelines have been issued by ICAI. This turnover is in turn used for determining the applicability of Tax Audit. The turnover as computed using these guidelines need not necessarily be your sale consideration (if you carry out trades in F&O segment, for instance).

When trading in delivery based equity shares is considered as a Business Income, taxable income is calculated as Sales Value - Buy Value - Transfer Expenses (STT & other charges)

As per the ICAI guideline, turnover is calculated at total sales value.

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@Sakshi_Shah @quicko
One more thing that seems confusing to me in relation to intraday computation is that the framing of the turnover computation instructions as per the ICAI guidance note seems to be indicative of being used from the perspective of determination of applicability of tax audit. See this for instance

Ref Link:
Pg: 25 Para 5.14

: A speculative transaction means a
transaction in which a contract for the purchase or sale of any
commodity, including stocks and shares, is periodically or ultimately
settled otherwise than by the actual delivery or transfer of the
commodity or scrips. Thus, in a speculative transaction, the contract
for sale or purchase which is entered into is not completed by giving or
receiving delivery so as to result in the sale as per value of contract
note. The contract is settled otherwise and squared up by paying out
the difference which may be positive or negative. As such, in such
transaction the difference amount is ‘turnover’. In the case of an
assessee undertaking speculative transactions there can be both
positive and negative differences arising by settlement of various such
contracts during the year. Each transaction resulting into whether a
positive or negative difference is an independent transaction. Further,
amount paid on account of negative difference paid is not related to
the amount received on account of positive difference. In such
transactions though the contract notes are issued for full value of the
purchased or sold asset the entries in the books of account are made
only for the differences. Accordingly, the aggregate of both positive
> and negative differences is to be considered as the turnover of such
> transactions for determining the liability to audit vide section 44AB.

But is the same method of turnover calculation to be used for actually computing business income? Because under this method of turnover computation, I won’t be allowed to debit the cost of shares as a deduction because the turnover only considers the sums of absolute gains or losses. So there could be a scenario where even if every trade is a loss, I’d still have a positive turnover against which I would be required to pay tax. This seems to be unfair.

Rather since it’s a guidance note that is recommendatory in nature only for the members of the institute. I think such a method could be used ONLY to determine tax audit applicability and turnover for actual tax computation could instead be the actual sale value of the trades with the purchase cost of shares and other charges debited against it in arriving at taxable business income.

Also if purchase cost of shares cannot be deducted against the turnover as prescribed by ICAI it seems highly unlikely to arrive at a profit figure of around 6 or 8 percent of turnover since it doesn’t seem practical to have that many deductions. Making the presumptive scheme lucrative in any case up to the upper limit, even in a situation where one is under total loss for every trade. The ICAI guidance note seems to be intended to be used only to determine tax audit applicability. It appears impractical for actual computation purpose.

Could you highlight the logic ICAI has used to determine turnover in such a manner? Especially the entries being made differently in the books of accounts part irrespective of how the contract notes are issued. I am a CA Final Student currently, would love to know your perspective on this

P.S: Sorry again for the long post :stuck_out_tongue_winking_eye:


The trading turnover in the case of equity intraday trading is the absolute profit i.e. sum of absolute values of profit and loss. Trading Turnover is calculated to determine the applicability of Tax Audit only. The realized profit or loss is the business income. Income Tax Liability is calculated on the realized profit at slab rates.

In the case of Presumptive Taxation Scheme u/s 44AD, the profit is calculated at 6% or 8% of turnover of the business. In the case of intraday trading, the profit percentage should be calculated on the absolute profit.

Read more about Presumptive Taxation Scheme Queries here


So to clarify, in case one opts for the presumptive scheme, the profit percentage (6 or 8 as the case maybe) has to be applied to the turnover of the business/trading turnover(i.e sum of absolute values of profit and loss) and not on the sale value of the shares itself?

Essentially turnover as per guidance note**(i.e the absolute sum of gains and losses)** is useful only for the purposes of determining tax audit applicability and presumptive scheme but not for the regular scheme.

If one chooses to not opt for the presumptive scheme, one has to take the net loss or gain (i.e NOT in absolute terms) and consider that as business/taxable income(as the sale value is considered as the business turnover here and purchase cost of shares is deducted against it to arrive at net profit/loss) . Subsequently tax would be paid at slab rates on business income so calculated.


Yes your interpretation is correct.

However you must keep in mind that the calculation of trading turnover differs for each segment.

For equity intraday trading and futures, it is considered as absolute profit. While in case of options trading, it is considered as absolute profit plus premium on sale of options.

Further in equity delivery trading, it is considered as business income where trading turnover is total sales value.

Hope this helps :slight_smile: