Can brokerage, STT and exit load be deducted while calculating capital gains?

Capital gains calculations can get confusing because investors often see several charges deducted from their transactions and assume all of them can be adjusted against the gains. Brokerage, exit load and Securities Transaction Tax (STT), however, are treated differently under the tax rules.

While some costs can reduce the taxable capital gain, others cannot be added to the purchase cost or deducted from the sale value. Knowing the difference can help investors avoid overstating or understating their capital gains while filing their tax returns.

Today's Q&A explains such details in response to a query by a reader.

This is also collected on the transactions of redemption of units of equity oriented schemes of mutual fund schemes.

For the purpose of computing capital gains the cost of acquisition is required to be deducted from net sale consideration of the capital asset transferred. The brokerage paid for purchase of share is nothing but part of the cost incurred for acquiring the shares.

Likewise, the net sale consideration is arrived after deducting the brokerage paid from the sale price of the shares and is the cost incurred for affecting the sale. So brokerage is required to be added to the purchase price to arrive at cost of acquisition of shares and is required to be deducted from the sale price to arrive at the value of net sale consideration.

Likewise, the net sale consideration for redemption of mutual fund units is computed after deducting the exit load paid and therefore has to be deducted from the NAV for computing the capital gains on units of mutual funds.

However, the STT is allowed to be considered while computing the business profits if the activity of purchase and sale of shares is treated as business activity.