A Guide to Stock Market Taxation in India (FY 2024-25)

Navigating the world of stock market investing is exciting, but understanding its tax implications is crucial for maximizing your returns. For Indian investors, being aware of how your profits are taxed is a fundamental part of smart financial planning.

This guide simplifies the essential tax rules for your stock market investments for the Financial Year 2024-25 (Assessment Year 2025-26). We’ll cover capital gains, dividends, and other key aspects to help you stay compliant and manage your taxes effectively.

Key Takeaways:

• Short-Term Capital Gains (STCG): Profits from stocks sold within 12 months are taxed at a flat rate of 15%.
• Long-Term Capital Gains (LTCG): Profits from stocks sold after 12 months are taxed at 10%, but only on gains exceeding ₹1 lakh in a financial year.
• Dividend Taxation: Dividends are added to your total income and taxed according to your applicable income tax slab.
• Loss Set-Off Rules: You can offset your capital losses against gains to reduce your tax liability, but specific rules apply.

Understanding Capital Gains: Short-Term vs. Long-Term

The tax you pay on your stock market profits depends on your holding period—the duration for which you own the shares before selling them.

• Short-Term Capital Asset: If you sell listed equity shares or equity mutual funds within 12 months of purchase, the transaction results in a short-term capital gain or loss.
• Long-Term Capital Asset: If you hold them for more than 12 months, it is considered a long-term capital asset.

Here are the applicable tax rates for FY 2024-25:

Type of Gain	Holding Period	Tax Rate (on gains)
Short-Term Capital Gain (STCG)	≤ 12 Months	15% (plus cess)
Long-Term Capital Gain (LTCG)	> 12 Months	10% (on gains above ₹1 lakh, plus cess)

Example: Let’s say you invested ₹2,00,000 in shares and sold them for ₹3,50,000, making a profit (capital gain) of ₹1,50,000.

• Scenario 1 (Short-Term): You sold the shares in 10 months.
  • Your entire gain of ₹1,50,000 is an STCG.
  • Tax Payable = 15% of ₹1,50,000 = ₹22,500 (plus cess).
• Scenario 2 (Long-Term): You sold the shares after 15 months.
  • Your gain of ₹1,50,000 is an LTCG.
  • The first ₹1 lakh is tax-free.
  • Taxable LTCG = ₹1,50,000 - ₹1,00,000 = ₹50,000.
  • Tax Payable = 10% of ₹50,000 = ₹5,000 (plus cess).

As you can see, holding your investments for the long term can lead to significant tax savings.

Dividend Taxation: Income from Your Investments

Since the abolition of the Dividend Distribution Tax (DDT) in 2020, dividends you receive from companies are fully taxable in your hands.

How it works: Any dividend income you earn is added to your total annual income (under “Income from Other Sources”) and taxed as per the income tax slab you fall under. For instance, if you are in the 30% tax bracket, your dividend income will also be taxed at 30% (plus applicable cess).

TDS on Dividends: Companies are required to deduct Tax at Source (TDS) at a rate of 10% if the total dividend income paid to you by that company in a financial year exceeds ₹5,000. You can claim credit for this TDS when filing your income tax return.

What is Securities Transaction Tax (STT)?

Securities Transaction Tax (STT) is a small tax levied on every transaction you make on a recognized Indian stock exchange. It’s crucial to remember that STT is a turnover tax, not a profit tax—you pay it regardless of whether you make a profit or a loss.

The rates vary based on the transaction type:

• Equity Delivery (buying or selling): 0.1% on the transaction value.
• Intraday Trading (on the sell side): 0.025% on the transaction value.

While you cannot claim a deduction for STT paid from your capital gains, its payment is a prerequisite for availing the concessional tax rates of 15% on STCG and 10% on LTCG.

Reporting Gains and Setting Off Losses in ITR

Properly reporting your investment activities in your Income Tax Return (ITR) is mandatory. It also allows you to manage your tax liability effectively by setting off losses against gains.

Reporting in ITR

• All capital gains and losses must be reported in your ITR.
• Typically, individuals with capital gains income need to file ITR-2 or ITR-3, as the simpler ITR-1 form cannot be used for this purpose.

Setting Off and Carrying Forward Losses

This is a powerful tool for tax planning. Here are the golden rules:

1. Short-Term Capital Loss (STCL): Can be set off against both Short-Term Capital Gains (STCG) and Long-Term Capital Gains (LTCG).
2. Long-Term Capital Loss (LTCL): Can ONLY be set off against Long-Term Capital Gains (LTCG). You cannot set off a long-term loss against a short-term gain.
3. Carry Forward: If you cannot set off all your losses in the same year, you can carry them forward for up to 8 assessment years.
4. Crucial Condition: To be eligible to carry forward your losses, you must file your ITR by the due date.

Example: Suppose in a financial year you have:

• STCG of ₹50,000
• LTCL of ₹30,000
• STCL of ₹20,000

How you can set it off:

1. First, use your STCL of ₹20,000 to offset your STCG of ₹50,000.
   • Remaining STCG = ₹50,000 - ₹20,000 = ₹30,000.
2. Your LTCL of ₹30,000 cannot be set off against the remaining STCG. You will have to pay tax on the ₹30,000 STCG.
3. You can carry forward the LTCL of ₹30,000 to future years to set it off against any LTCG you make in the next 8 years.

Understanding these tax rules is fundamental to being a smart investor. It helps you plan your trades, manage your portfolio better, and ensure you are compliant with the law, ultimately helping you keep more of your hard-earned profits.

Disclaimer: This article is for informational purposes only and does not constitute financial or tax advice. Please consult with a qualified tax professional for advice tailored to your specific situation.