Chapter 14 of 15
Stock Market Taxation in India
STCG, LTCG, STT, and dividend taxation for stocks.
Rahul got a notice.
Not the exciting kind, not a BCCI squad announcement. This was a notice from the Income Tax Department.
"You have sold shares worth ₹14.2 lakhs during FY 2023-24. These gains have not been reported in your ITR. Please respond within 15 days."
He'd made ₹2.1 lakhs in gains from selling stocks. He'd done his own ITR using a simple tax filing app that didn't prompt him for capital gains. He genuinely didn't know he needed to report it. He does now.
If you trade or invest in stocks in India, you will owe tax. The rules are specific and not negotiable. Understanding them upfront saves you from Rahul's very stressful February morning.
Two Types of Tax on Stock Gains
All stock investing tax in India flows from one question: how long did you hold the stock before selling?
STCG on equity stocks applies when you sell shares held for less than 12 months. Tax rate: 20% (increased from 15% in Budget 2024). No ₹1 lakh exemption, the full gain is taxable.
LTCG on equity stocks applies when you sell shares held for 12 months or more. Tax rate: 12.5% on gains above ₹1.25 lakh per financial year (threshold increased from ₹1 lakh in Budget 2024). Gains below ₹1.25 lakh are exempt.
The holding period starts the day after you buy and ends the day you sell. Settlement date doesn't matter, the trade date matters.
| Type | Holding Period | Tax Rate | Exemption |
|---|---|---|---|
| STCG (Equity) | Less than 12 months | 20% | None |
| LTCG (Equity) | 12 months or more | 12.5% | First ₹1.25 lakh exempt per year |
| STCG (Debt Funds / Bonds) | Less than 36 months | As per income slab | None |
| LTCG (Debt Funds / Bonds) | 36 months or more | 12.5% (no indexation from FY25) | None |
Rahul bought shares of an IT company in April 2023 at ₹1,200 per share (100 shares = ₹1.2 lakh cost). He sold in November 2023 at ₹1,450 per share = ₹1.45 lakh proceeds. Holding period: 7 months. This is STCG. Gain = ₹25,000. Tax = 20% of ₹25,000 = ₹5,000. He also sold a second stock after holding 14 months, making ₹80,000 LTCG. Total LTCG for the year: ₹80,000, below ₹1.25 lakh threshold, so zero LTCG tax. Total tax owed: ₹5,000.
Securities Transaction Tax (STT): Paid Automatically
STT is a tax levied at the point of transaction, automatically deducted by your broker on every equity trade. It's separate from income tax on gains. STT on equity delivery trades: 0.1% on both buy and sell.
STT rates (as of 2025):
- Equity delivery (buy): 0.1%
- Equity delivery (sell): 0.1%
- Intraday (sell side only): 0.025%
- Futures (sell side): 0.02%
- Options (sell side): 0.1% on premium
STT is non-refundable and doesn't count toward your tax liability, it's a separate government levy. But LTCG and STCG on listed equity are specifically taxable because STT was already paid on the transaction.
F&O Taxation: The Most Confusing Part
Profits from trading Futures and Options (F&O) are treated as business income, not capital gains, regardless of holding period. They're taxed at your income tax slab rate (up to 30% for the highest slab). F&O income must be reported under "Business and Profession" in ITR-3.
This matters enormously. If Rahul makes ₹5 lakhs from F&O and his cricketer income puts him in the 30% tax bracket, he pays ₹1.5 lakhs tax on the F&O gains, plus applicable surcharge and cess.
The benefit: F&O losses can be set off against F&O profits in the same year, and carried forward for 8 years to set off future F&O profits.
Many retail F&O traders don't report losses because they think "I lost money, no tax due." Wrong. F&O activity (even at a loss) must be reported in ITR-3. If you don't, you lose the ability to carry forward losses for future setoff. And a notice like Rahul's might follow if your broker's data is mismatched with what you filed.
Intraday Trading: Also Business Income
If you buy and sell the same stock within the same trading day (intraday), the gains are classified as speculative business income, taxed at your slab rate, similar to F&O.
Intraday losses can only be set off against other speculative income (not against STCG or LTCG from delivery trades). They can be carried forward for 4 years.
This is one reason SEBI's finding that 90%+ of intraday traders lose money is important, they're also paying the highest effective tax rate on any gains, while their losses have limited setoff utility.
Where to Report Capital Gains
ITR-1 (Sahaj): For salary income only. Does NOT cover capital gains. If you've sold any stocks or mutual funds, you CANNOT use ITR-1.
ITR-2: Correct form for salary income + capital gains from stocks and mutual funds (no F&O).
ITR-3: Required if you have F&O or intraday trading income (treated as business income).
Most tax filing apps ask you the right questions. But you need to know which form applies to upload the correct capital gains schedule.
Every broker (Zerodha, Groww, etc.) provides a P&L / capital gains statement for the financial year. Download it by April. This shows every trade's buy price, sell price, holding period, and whether it's STCG or LTCG. Use this to fill your ITR, don't try to calculate from memory or scrolling through trade history.
Tax Loss Harvesting: The Smart Move
Tax loss harvesting is the intentional realisation of losses on investments before March 31st to offset capital gains from winning investments, reducing your total tax liability.
How it works:
- Rahul has made ₹3 lakh LTCG on one stock this year
- He's sitting on an unrealised loss of ₹80,000 on another stock
- He sells the losing stock before March 31st to realise the ₹80,000 loss
- His net LTCG = ₹3 lakh − ₹80,000 = ₹2.2 lakh
- After ₹1.25 lakh exemption: taxable LTCG = ₹95,000 at 12.5% = ₹11,875 tax
- Without harvesting: taxable LTCG = ₹1.75 lakh at 12.5% = ₹21,875 tax
- Saving: ₹10,000
After selling for the loss, he can buy the same stock back after waiting the required settlement period, maintaining his portfolio position while capturing the tax benefit.
It's mid-March. Rahul reviews his portfolio. He's made ₹4.2 lakhs in LTCG from a pharma stock sold in December. He has an infrastructure stock with ₹1.8 lakhs in unrealised loss, he still likes the company long-term. He sells the infrastructure stock on March 25th, realising the ₹1.8L loss. Net LTCG = ₹4.2L − ₹1.8L = ₹2.4L. After ₹1.25L exemption: taxable LTCG = ₹1.15L. Tax = 12.5% of ₹1.15L = ₹14,375. He buys the infrastructure stock back the next week. Effective saving: ₹22,500 in tax.
Dividend Taxation
Since FY 2020-21, dividends from Indian companies are taxable in the hands of the investor at their applicable income tax slab rate (not at a flat rate). If Rahul is in the 30% bracket, he pays 30% tax on dividends received.
TDS (Tax Deducted at Source): companies deduct 10% TDS on dividends above ₹5,000 per year. This is credited against your final tax liability.
When calculating post-tax returns on a stock, factor in both: LTCG/STCG tax on gains AND slab-rate tax on dividends. A high-dividend stock like Coal India might look attractive on dividend yield, but if you're in the 30% bracket, your effective post-tax dividend yield is 30% lower.
Common Tax Mistakes on Stocks
- Filing ITR-1 when you've traded stocks: ITR-1 doesn't have a capital gains schedule. The ITD's AIS will show your transactions: mismatch triggers notice.
- Not reporting F&O losses: You can't carry them forward if you don't report them.
- Confusing trade date and settlement date for holding period: Use trade date.
- Forgetting to account for STT, brokerage, and other charges: These reduce your capital gain (they're part of acquisition cost).
- Not downloading broker P&L statement: Calculating from memory leads to errors.
- Missing the advance tax deadline: If your total tax liability exceeds ₹10,000 in a year, you must pay advance tax in quarterly installments. Failing to pay triggers interest under Section 234B and 234C.
Key Takeaways
- STCG on equity: 20% (held less than 12 months). LTCG on equity: 12.5% above ₹1.25 lakh (held 12+ months)
- STT is deducted automatically by your broker: it's separate from income tax on gains
- F&O and intraday gains are business income taxed at slab rate (up to 30%): not capital gains
- Use ITR-2 for salary + capital gains. Use ITR-3 if you have F&O or intraday trading income
- Tax loss harvesting before March 31 can legally reduce your capital gains tax
- Download your broker's capital gains statement every April: don't guess or calculate from memory
Use our Income Tax Calculator to estimate your total tax liability including capital gains, or explore building a long-term portfolio with tax-efficiency in mind.
Rahul buys 100 shares in June 2023 and sells them in August 2024. What type of capital gain is this and at what rate is it taxed?
Disclaimer: This article is for educational purposes only and does not constitute personalized financial advice. Investments are subject to market risks. Past performance does not guarantee future returns. Please consult a SEBI-registered investment adviser before making investment decisions.