Stock Market Taxation - Capital Gains, STT & TDS

Stock Market Taxation India: FY 2025-26 Complete Guide (The FIFO Error That Cost Me 3 Hours)

After filing my first ITR with equity gains, I realised I had under-reported my tax because I didn't understand the FIFO method for shares held in multiple lots. The revised return cost me 3 hours. Here's the complete FY 2025-26 picture so you don't make the same mistake.

The error was simple: I had bought shares of the same company in three tranches over 14 months. When I sold a portion, I incorrectly calculated my holding period using the most recent buy date, which showed a long-term gain. The Income Tax Department uses FIFO (First In, First Out), the oldest shares are assumed sold first. When I recalculated correctly, some of my "LTCG" became STCG, and the tax liability changed. The revised return took three hours of reconstructing buy dates from broker statements.

Learn from my error. Understand the rules before you sell.

The Big Picture: How Equity Gains Are Taxed in FY 2025-26

The Finance Act 2024 revised capital gains tax rates on equity, effective from July 23, 2024. These rates apply to FY 2025-26 (assessment year 2026-27).

Critical change from Finance Act 2024: Before July 23, 2024, LTCG was taxed at 10% and STCG at 15%. The Finance Act 2024 (Union Budget 2024) revised these to 12.5% and 20% respectively, effective for all sales on or after July 23, 2024. The LTCG exemption was also raised from ₹1 lakh to ₹1.25 lakh simultaneously.

LTCG: 12.5% with ₹1.25 Lakh Annual Exemption

Under Section 112A of the Income Tax Act (inserted by Finance Act 2018, amended by Finance Act 2024), long-term capital gains on listed equity shares and equity mutual funds are taxed at 12.5% on gains exceeding ₹1.25 lakh per financial year.

Key points:

• The ₹1.25 lakh exemption is per financial year, not per transaction
• No indexation benefit is available (unlike debt MFs or real estate)
• The exemption applies to LTCG across all equity instruments in aggregate for the year
• STT (Securities Transaction Tax) must have been paid on both buy and sell sides

Tax-loss harvesting tip: Review your equity portfolio before March 31 each year. If you have unrealised losses in any stock, book them (sell) before year-end. Those losses reduce your net LTCG, potentially bringing it under ₹1.25 lakh. You can immediately repurchase the same stock. This is called tax-loss harvesting and is entirely legal.

STCG: 20% Flat, No Exemption

Under Section 111A of the Income Tax Act (amended by Finance Act 2024), short-term capital gains on equity, shares held for 12 months or less, are taxed at a flat 20%.

There's no basic exemption for STCG. Even ₹1,000 in short-term equity gains is taxable.

Why does this matter? Because the gap between STCG and LTCG treatment, 20% vs 0% on gains under ₹1.25 lakh, is enormous. Two months of patience can save you thousands.

The FIFO Method: Why I Made My Mistake

The FIFO rule applies when you've bought shares of the same company in multiple lots. The Income Tax Act treats shares on a first-in, first-out basis, the shares purchased earliest are deemed sold first.

Practical tip: Your broker's tax P&L report automatically applies FIFO. Zerodha, Groww, and Upstox all generate a tax P&L for each financial year. Download this from your broker and use these figures for ITR filing. Don't manually calculate if you have multiple lots, always use the broker-generated report.

Intraday and F&O: Business Income, Not Capital Gains

This distinction catches many investors off guard.

Intraday equity trading (buying and selling the same stock on the same day) is classified as speculative business income under Section 43(5) of the Income Tax Act. It's NOT capital gains.

F&O trading (futures and options) is classified as non-speculative business income under Section 43(5)(d). Also NOT capital gains.

The consequences:

• Both are taxed at your income tax slab rate (5%, 20%, or 30% depending on total income)
• Both require filing ITR-3 (not ITR-1 or ITR-2: those filings will be rejected)
• F&O turnover calculation: the absolute sum of all profits and losses (not net: every profitable trade and every losing trade is added in absolute terms)
• Tax audit required if F&O turnover exceeds ₹10 crore (or ₹2 crore if cash transactions form more than 5% of receipts), under Section 44AB of the Income Tax Act

Dividend Taxation: Slab Rate Since 2020

Prior to April 1, 2020, dividends were tax-free in the hands of shareholders (the company paid Dividend Distribution Tax). The Finance Act 2020 abolished DDT. Dividends are now:

• Taxable in the investor's hands at their applicable income tax slab rate
• Subject to 10% TDS by the company if dividends from that company exceed ₹5,000 in a financial year (under Section 194)
• Reportable in Schedule OS (Other Sources) of ITR

You can claim the TDS as credit when filing your return. If you receive dividends from multiple companies, check all TDS deductions against Form 26AS or AIS (Annual Information Statement) in the Income Tax portal.

Loss Set-Off Rules: How to Use Losses Strategically

STCL is more valuable than LTCL: Short-term capital losses can offset both STCG and LTCG. Long-term capital losses can only offset LTCG. If you're harvesting losses strategically, booking short-term losses gives you more flexibility.

STT: The Unavoidable Tax

Securities Transaction Tax (STT) is levied by the government on every market transaction. You can't avoid it, it's built into every trade. For FY 2025-26:

• Equity delivery purchase: 0.1% of transaction value
• Equity delivery sale: 0.1% of transaction value
• Equity intraday sale: 0.025% of transaction value
• F&O options sale: 0.1% of premium (option premium only, not notional value)
• F&O futures sell side: 0.02% of transaction value

STT is paid to the exchange and is NOT a deductible expense against capital gains (though it was a deductible expense before FY 2009-10). It's simply a cost of transacting.

Key Deadlines: Missing These Costs You Dearly

July 31: ITR filing deadline for non-audit cases. Missing this deadline means you permanently lose the right to carry forward capital losses from that year. This is the most common and most painful tax mistake investors make. Set a calendar reminder now.

Don't learn this the hard way.

Advance tax, quarterly payments: If your total tax liability (after TDS credits) exceeds ₹10,000 for the year, you must pay advance tax quarterly:

• June 15: 15% of estimated annual tax
• September 15: 45% of estimated annual tax (cumulative)
• December 15: 75% (cumulative)
• March 15: 100% (cumulative)

Missing advance tax triggers interest under Sections 234B (on shortfall) and 234C (on each installment). The interest rate is 1% per month, on a ₹50,000 shortfall, that's ₹6,000 per year in avoidable interest.

Keep records for 6 years: Broker contract notes, demat statements, P&L reports. Most brokers retain these digitally but download and save your own copies. The Income Tax Act allows the department to reopen assessments up to 6 years (10 years in fraud cases).

Use the Income Tax Calculator to estimate your total liability including capital gains. For tax-saving investment options, read the Complete Tax Saving Guide. If you also hold mutual funds, note that equity mutual fund taxation follows identical LTCG and STCG rates, the same ₹1.25 lakh exemption applies across both stocks and equity funds in aggregate for the financial year.

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Sources

1. Finance Act 2024. Revised STCG rate to 20% (Section 111A) and LTCG rate to 12.5% with ₹1.25L exemption (Section 112A), effective July 23, 2024; Gazette of India notification
2. Income Tax Act, 1961. Section 111A (STCG on equity), Section 112A (LTCG on equity), Section 43(5) (intraday as speculative income), Section 44AB (tax audit threshold), Section 194 (TDS on dividends)
3. CBDT Circular on Capital Gains. Clarifications on FIFO method for equity sold in multiple lots; available at incometax.gov.in
4. NSE India. STT rate schedule for equity delivery, intraday, and F&O transactions; nseindia.com
5. Income Tax Department AIS/Form 26AS. Annual Information Statement for verifying TDS deductions and dividend income; incometax.gov.in