How Income tax is Levied on Your Stock Market Transactions

The applicable tax rate depends on this classification. 

What is Short-Term Capital Gain (STCG)? 

Short-Term Capital Gain arises when listed equity shares or equity-oriented mutual funds are sold within 12 months of purchase and Securities Transaction Tax (STT) has been paid wherever required. 

For transactions governed by the Income-tax Act, 1961, STCG on eligible equity transactions under Section 111A is generally taxed at 20% for transfers made on or after July 23, 2024, along with applicable surcharge and cess. For Tax Year 2026-27 onwards, the Income-tax Act, 2025 applies. 

STCG Formula 

Short-Term Capital Gain = Sale Price − Purchase Price − Transfer Expenses 

Example 

Purchase price = ₹1,50,000 

Sale price = ₹1,90,000 

Brokerage and other eligible expenses = ₹2,000 

STCG = ₹1,90,000 − ₹1,50,000 − ₹2,000 

STCG = ₹38,000 

Tax payable = 20% of ₹38,000 = ₹7,600 (excluding cess and surcharge). 

What is Long-Term Capital Gain (LTCG)?

Long-term capital gain applies when you hold listed equity shares for more than 12 months.

For eligible securities, LTCG exceeding the annual threshold of ₹1.25 lakh is generally taxed at 12.5%, subject to the applicable conditions, including prescribed STT requirements. For Tax Year 2026-27 onwards, the Income-tax Act, 2025 applies.

LTCG Formula

Long-Term Capital Gain = Sale Price − Purchase Price − Eligible Expenses

Example

• Purchase price = ₹5,00,000
• Sale price = ₹8,00,000
• Eligible expenses = ₹5,000

LTCG = ₹8,00,000 − ₹5,00,000 − ₹5,000

LTCG = ₹2,95,000

Annual threshold = ₹1,25,000

Taxable LTCG = ₹1,70,000

Tax = 12.5% of ₹1,70,000 = ₹21,250 (excluding cess and surcharge).

STCG Vs LTCG

• Short-Term Capital Gain (STCG) applies when listed equity shares are sold within 12 months of purchase.
• Long-Term Capital Gain (LTCG) applies when listed equity shares are sold after more than 12 months.
• STCG is taxed at 20%, plus applicable surcharge and cess.
• LTCG is taxed at 12.5% on gains exceeding the applicable annual threshold of ₹1.25 lakh, subject to prescribed conditions.
• Securities Transaction Tax (STT) must generally be paid on eligible transactions to claim the concessional tax treatment under Sections 111A and 112A.

How is Intraday Trading Taxed?

Intraday trading is treated differently from delivery-based investing because there is no actual transfer of ownership of shares.

As a result, profits from intraday trades are classified as speculative business income, while losses are considered speculative business losses under the Income-tax Act.

Speculative business losses can generally be set off only against eligible speculative business profits and can be carried forward for up to four years, subject to the prescribed conditions, including timely filing of the return where applicable.

How is Futures & Options (F&O) Trading Taxed?

Income from Futures & Options is generally treated as non-speculative business income.

This means traders may be able to claim eligible business expenses such as:

• Brokerage
• Commissions
• Trading-related subscriptions
• Eligible telephone and internet expenses
• Professional fees

Tax-audit requirements may apply depending on the taxpayer's turnover, profit declaration, and other prescribed conditions. For F&O traders, turnover is calculated according to prescribed tax rules and is not simply the total value of the contracts traded.

How are Dividends Taxed?

Earlier, companies paid Dividend Distribution Tax (DDT). The government has abolished this system.

Today:

• Dividends are taxable in the hands of investors.
• Dividend income is added to the taxpayer's total income.
• Tax is charged according to the individual's applicable income-tax slab.
• Tax Deducted at Source (TDS) may apply once prescribed thresholds are crossed.

What is Securities Transaction Tax (STT)?

Securities Transaction Tax (STT) is a tax levied on the purchase or sale of specified securities executed through recognised stock exchanges.

Brokers collect STT automatically and deposit it with the Government. Paying STT is also an important condition for availing concessional tax treatment under Sections 111A and 112A for eligible equity transactions.

Can You Set Off Capital Losses?

The Income-tax Act allows investors to adjust eligible capital losses against capital gains, helping reduce their overall tax liability. The set-off rules depend on the type of loss incurred.

A short-term capital loss (STCL) can generally be adjusted against both short-term and long-term capital gains. In contrast, a long-term capital loss (LTCL) can be set off only against long-term capital gains.

If the entire loss cannot be adjusted in the same financial year, the unabsorbed amount can be carried forward for up to 8 assessment years, provided the income tax return is filed within the prescribed due date.

Do F&O Traders Need to Maintain Accounting Records?

Since Futures and Options (F&O) trading is treated as business income, traders may need to maintain proper accounting records under the Income-tax Act.

For individuals or Hindu Undivided Families (HUFs), maintaining books may be required if income exceeds ₹2.5 lakh or sales, turnover, or gross receipts exceed ₹25 lakh in any of the preceding 3 years. For a newly established business, the requirement may apply if the prescribed thresholds are expected to be exceeded in the first year.

For other taxpayers, the applicable limits are ₹1.2 lakh income or ₹10 lakh gross receipts. Traders should maintain essential documents such as trading statements, bank records, and expense proofs, as these are required for preparing the profit and loss statement and balance sheet during tax filing.

Which ITR Form Should You File?

The applicable return form depends on the nature of your income.

Investor Type	Commonly Used ITR
Individuals/HUFs with capital gains but no business or professional income	ITR-2
Individuals/HUFs having business income from activities such as F&O trading	ITR-3