The income from share transaction can occur in following forms

1. Share trading

2. Speculative trade

3. F & O transactions

4. Capital Gains

Allowance of STT for First three types (1, 2 & 3)

From Assessment Year Asst Year 2009-10 (FY 2008-09 ) , Securities Transaction Tax (STT) is defined as an expense u/s 36(xv) of the I T Act

(xv) an amount equal to the securities transaction tax paid by the assessee in respect of the taxable securities transactions entered into in the course of his business during the previous year, if the income arising from such taxable securities transactions is included in the income computed under the head Profits and gains of business or profession.

Therefore , for share trading income, or speculative income, or Futures & Options trades , STT is an expense and deductible.

Can You Deduct STT from Capital Gains?

However , if you are selling the shares as investments , the STT can not be deducted as cost of acquisition . This is provided under the proviso to section 48 which is regarding cost of acquisition

Proviso to section 48

Provided also that no deduction shall be allowed in computing the income chargeable under the head Capital gains in respect of any sum paid on account of securities transaction tax under Chapter VII of the Finance (No. 2) Act, 2004

Thumb rule is that STT is cost for all kinds of transactions except capital gains.