The tax treatment of investments depends on the type of investment, how long it is held, and whether the income is treated as capital gains or business income.
Gains from delivery-based equity shares and equity mutual funds are classified as either short-term capital gains (STCG) or long-term capital gains (LTCG) based on the holding period. However, trading activities such as intraday trading and futures & options () are taxed differently.
Let’s take a look at how different investment and trading activities in the stock market are taxed.
How is income from delivery-based listed equity shares taxed?
For listed equity shares, the holding period determines whether the gains are classified as short-term or long-term .
If an investor sells the shares within 12 months of purchase, the profits are treated as short-term capital gains (STCG) and taxed at 20%.
If the shares are sold after being held for more than 12 months, the gains qualify as long-term capital gains (LTCG). These gains are taxed at 12.5%, but only on the amount exceeding ₹1.25 lakh in a financial year. Total gains up to this limit remain tax-exempt.
How is income from intraday trading taxed?
Intraday trading, where shares are bought and sold on the same day without taking delivery, is treated differently from regular investing.
Under Section 43(5) of the Income Tax Act, intraday trading is considered speculative business income. Therefore, the income is taxed under the head “Profits and Gains of Business or Profession” rather than capital gains.
The profits are added to the taxpayer’s total income and taxed according to the applicable income tax slab rate.
How are unlisted shares taxed?
The taxation of unlisted shares depends on how long the shares are held before being sold.
If unlisted shares are sold within 24 months, the gains are treated as short-term capital gains and taxed according to the investor’s applicable income tax slab.
If the shares are held for more than 24 months, the gains qualify as long-term capital gains and are taxed at 12.5% without indexation benefits.
How are equity mutual funds taxed?
Equity-oriented mutual funds follow the same tax framework as listed equity shares.
If the units are redeemed within 12 months, the gains are classified as short-term capital gains (STCG) and taxed at 20%.
For units held for more than 12 months, the gains are treated as long-term capital gains (LTCG) and taxed at 12.5%.
How are futures and options (F&O) transactions taxed?
F&O trading income is classified as non-speculative business income under the Income Tax Act.
The resulting profits are added to the taxpayer’s total income and taxed according to the applicable income tax slab rate, which can range from 5% to 30%.
How does taxation differ across market?
| Investment Type | When Does It Become Long-Term? | Tax if Sold Earlier | Tax if Held Longer |
| Listed equity shares (delivery-based) | After 12 months | Short-term capital gains taxed at 20% | Long-term capital gains taxed at 12.5% on gains exceeding ₹1.25 lakh in a financial year |
| Intraday equity trading | Not applicable | Treated as speculative business income and taxed as per the individual’s income tax slab | Not applicable |
| Unlisted shares | After 24 months | Short-term gains taxed as per the applicable income tax slab | Long-term gains taxed at 12.5% without indexation |
| Equity-oriented mutual funds | After 12 months | Short-term capital gains taxed at 20% | Long-term capital gains taxed at 12.5% on gains above ₹1.25 lakh in a financial year |
| Futures & Options (F&O) | Not based on holding period | Treated as non-speculative business income and taxed according to the applicable income tax slab | Not applicable |
Disclaimer: This is only for informational and educational purposes. Please consult a qualified tax expert for the latest tax laws and regulations.