Investing in the stock market can be highly rewarding, but it’s essential to understand the tax implications of your profits. Whether you’re making money through capital gains, dividends, or intraday trading, taxation laws determine how much of your profit you get to keep.
Different countries have different tax structures, and in India, stock market profits are classified based on investment duration and type of income. This guide will provide a detailed explanation of how stock market profits are taxed, the applicable tax rates, exemptions, and tax-saving strategies.
Types of Stock Market Profits and Their Taxation
Stock market profits can be categorized into capital gains, dividend income, and business income (trading profits). Each category is taxed differently:
| Type of Stock Market Income | Tax Treatment |
|---|---|
| Short-Term Capital Gains (STCG) | Taxed at 15% (if shares are sold within one year) |
| Long-Term Capital Gains (LTCG) | Taxed at 10% (above ₹1 lakh profit) (if shares are held for more than one year) |
| Dividend Income | Taxed at the individual’s slab rate |
| Intraday Trading (Speculative Income) | Taxed as business income (as per tax slab) |
| Futures & Options (F&O) Trading | Taxed as business income (as per tax slab) |
Each of these categories is explained in detail below.
1. Capital Gains Tax on Stocks and Equity Mutual Funds
When you buy shares or equity mutual funds and sell them at a profit, the profit is called capital gains. The tax rate depends on how long you held the asset before selling it.
A. Short-Term Capital Gains (STCG) Tax
✔ If you sell shares or equity mutual funds within 12 months of purchase, the profit is considered short-term capital gains (STCG).
✔ Tax Rate: 15% on profits, irrespective of your income tax slab.
Example:
- You buy 100 shares of Infosys at ₹1,500 per share.
- Sell them 6 months later at ₹1,800 per share.
- Your profit = (₹1,800 – ₹1,500) × 100 = ₹30,000.
- Tax payable = 15% of ₹30,000 = ₹4,500.
B. Long-Term Capital Gains (LTCG) Tax
✔ If you sell shares or equity mutual funds after holding them for more than 12 months, the profit is classified as long-term capital gains (LTCG).
✔ Tax Rate:
- 0% for profits up to ₹1 lakh per year (exempt).
- 10% on profits exceeding ₹1 lakh per year (without indexation benefits).
Example:
- You buy 200 shares of HDFC Bank at ₹2,000 per share.
- Sell them 18 months later at ₹2,800 per share.
- Your profit = (₹2,800 – ₹2,000) × 200 = ₹1,60,000.
- LTCG Tax: ₹1,60,000 – ₹1,00,000 (exempt) = ₹60,000 taxable.
- Tax payable = 10% of ₹60,000 = ₹6,000.
2. Taxation on Dividends
Dividends are payments made by companies to their shareholders from their profits.
✔ Before April 2020: Dividend income was tax-free in the hands of investors because companies paid a Dividend Distribution Tax (DDT).
✔ After April 2020: Dividends are taxed in the hands of the investor at their applicable income tax slab rate.
TDS (Tax Deducted at Source) on Dividends
- If dividend income exceeds ₹5,000 in a financial year, the company deducts TDS at 10% before paying the investor.
- If your total income is below the taxable limit, you can claim a refund when filing your Income Tax Return (ITR).
Example:
- You receive ₹50,000 as dividends from various stocks in a year.
- Your income tax slab is 30%.
- You must pay 30% of ₹50,000 = ₹15,000 as tax.
3. Taxation on Intraday Trading (Speculative Income)
✔ Intraday trading refers to buying and selling shares on the same day.
✔ The profits from intraday trading are treated as speculative income and taxed as per your income tax slab.
✔ Losses from intraday trading can only be set off against intraday profits and can be carried forward for up to 4 years.
Example:
- You make ₹80,000 in intraday profits in a year.
- If your total annual income is ₹10 lakh, you fall under the 30% tax slab.
- Tax payable = 30% of ₹80,000 = ₹24,000.
4. Taxation on Futures and Options (F&O) Trading
✔ F&O trading profits are treated as business income and taxed as per income tax slabs.
✔ You can claim business expenses like brokerage, internet bills, and advisory fees as deductions.
✔ Losses can be carried forward for 8 years and set off against business income.
Example:
- You earn ₹2 lakh profit from F&O trading.
- If your total income is ₹12 lakh, you fall in the 30% tax bracket.
- Tax payable = 30% of ₹2,00,000 = ₹60,000.
How to Reduce Tax on Stock Market Profits (Tax-Saving Strategies)
1. Use LTCG Exemption of ₹1 Lakh
- If your long-term capital gains are below ₹1 lakh, they are tax-free.
- You can sell and rebuy stocks before the financial year ends to book tax-free gains.
2. Carry Forward Losses
- Short-term losses can be set off against both STCG and LTCG.
- Long-term losses can only be set off against LTCG.
- Losses can be carried forward for 8 years.
Example:
- You have ₹1,50,000 short-term capital loss from one stock and ₹2,00,000 short-term gain from another.
- You can set off ₹1,50,000 against the gain, reducing your taxable STCG to ₹50,000 instead of ₹2,00,000.
3. Tax Deduction for Traders
- If you are classified as a trader (F&O or intraday), you can deduct business expenses like: ✔ Internet charges
✔ Advisory fees
✔ Brokerage charges
✔ Office rent
4. Invest Through Tax-Exempt Accounts
- Equity-Linked Savings Scheme (ELSS) mutual funds offer tax benefits under Section 80C.
- Investments in PPF, NPS, and EPF are tax-free and can help reduce taxable income.
5. Use HUF (Hindu Undivided Family) Account
- If you qualify for an HUF account, you can split your income across multiple family members, reducing the overall tax burden.
Filing Taxes for Stock Market Profits
Which ITR Form to Use?
✔ ITR-1: For salaried individuals with dividend income but no capital gains.
✔ ITR-2: For individuals with capital gains (STCG/LTCG).
✔ ITR-3: For individuals with F&O trading or intraday trading income (business income).
Tax Audit for Traders
✔ If your F&O turnover exceeds ₹10 crore, a tax audit is required under Section 44AB.
✔ If your net profit is less than 6% of turnover, you may also need a tax audit.
Understanding taxation on stock market profits is crucial for investors and traders to maximize after-tax returns. Whether you earn profits from capital gains, intraday trading, dividends, or F&O trading, knowing how taxes apply can help you plan your investments efficiently.
By using tax-saving strategies like setting off losses, investing in tax-exempt instruments, and optimizing business deductions, you can reduce your tax liability and grow your wealth more effectively.
