Taxation on Stock Market

Understanding the taxation of various investment and trading activities is crucial for financial planning. Here's a detailed breakdown of the tax implications for Capital Gains, Intraday Trading, Futures & Options (F&O), and Speculative Income for the Financial Year (FY) 2025-26 (Assessment Year 2026-27).

1. Capital Gains Tax a. Short-Term Capital Gains (STCG):

Definition: Profits from the sale of equity shares or equity-oriented mutual funds held for 12 months or less.
Tax Rate: 20%.
Example: If you purchase shares worth ₹2,00,000 and sell them within 6 months for ₹2,50,000, your gain of ₹50,000 will be taxed at 20%, resulting in a tax liability of ₹10,000.

b. Long-Term Capital Gains (LTCG):

Definition: Profits from the sale of equity shares or equity-oriented mutual funds held for more than 12 months.
Tax Rate: 12.5% on gains exceeding ₹1,25,000 per annum.
Example: If you have a total LTCG of ₹2,00,000 in a financial year, the taxable amount is ₹75,000 (i.e., ₹2,00,000 - ₹1,25,000 exemption). The tax would be 12.5% of ₹75,000, amounting to ₹9,375.

Note: The exemption limit for LTCG has been increased from ₹1,00,000 to ₹1,25,000 as per the latest budget.

2. Intraday Trading Taxation

Nature of Income: Classified as Speculative Business Income since it involves buying and selling stocks on the same day without actual delivery.
Tax Treatment: Taxed as per the individual's applicable income tax slab rates.
Example: If your total income, including intraday trading profits of ₹1,00,000, falls under the 30% tax bracket, the tax on intraday profits would be ₹30,000.
Loss Set-Off: Speculative losses can only be set off against speculative gains and can be carried forward for 4 years.

3. Futures & Options (F&O) Trading Taxation

Nature of Income: Considered as Non-Speculative Business Income.
Tax Treatment: Profits are added to the individual's total income and taxed according to the applicable income tax slab rates.
Example: If you earn ₹2,00,000 from F&O trading and your total income is ₹8,00,000, your total taxable income becomes ₹10,00,000. If this places you in the 30% tax bracket, the tax on F&O income would be ₹60,000.
Loss Set-Off: Non-speculative business losses can be set off against any other income (except salary) and can be carried forward for 8 years.
Audit Requirement: If turnover exceeds ₹1 crore or profits are less than 6% of turnover, a tax audit may be required.

4. Speculative Income

Definition: Income from activities like intraday trading without actual delivery of shares.
Tax Treatment: Treated as Speculative Business Income and taxed as per individual slab rates.
Loss Set-Off: Speculative losses can only be set off against speculative gains and carried forward for 4 years.

Securities Transaction Tax (STT)

Applicability: STT is levied on the transaction value of securities traded on recognized stock exchanges.
Rates:
- Equity Delivery: 0.1% on both buy and sell sides.
- Equity Intraday: 0.025% on the sell side.
- Futures (Equity): 0.0125% on the sell side.
- Options (Equity): 0.0625% on the sell side (on premium).

Note: The STT rates were increased by 25% effective from April 1, 2023. Recent Regulatory Changes The Securities and Exchange Board of India (SEBI) has introduced measures to curb excessive speculative trading by retail investors

Increased Minimum Contract Size: The minimum contract size for derivatives has been raised to ₹1.5 million.
Limited Weekly Contracts: Only one weekly options contract per exchange is allowed.

These changes aim to reduce the high risks associated with speculative trading, as studies have shown that a majority of retail traders incur losses in derivatives trading.

Key Takeaways:

Investors: Benefit from a ₹1,25,000 exemption on LTCG, with gains above this taxed at 12.5%.
Traders: Income from intraday and F&O trading is treated as business income and taxed as per applicable slab rates.
Loss Management: Speculative losses have stricter set-off and carry-forward rules compared to non-speculative losses.

It's advisable to maintain detailed records of all transactions and consult with a tax professional to ensure compliance and optimize tax liabilities.

Thu Mar 20, 2025

Taxation on Stock Market

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