In the last financial year, India’s direct tax collection rose by 17.7%, reaching ₹19.58 lakh crore, reflecting the growing participation of investors in stock markets and mutual funds. With changing tax regulations and new rules on capital gains, understanding taxation is now more important than ever.
Whether you’re an investor or a trader, knowing how your profits are taxed can help you make smarter financial decisions. In this article, we will break down taxation in a simple way, covering everything from capital gains to tax-saving strategies, ensuring you stay compliant while maximising your returns.
Understanding Capital Gains Tax
When you sell an investment at a profit, the income is categorised as capital gains. These are divided into:
- Long-Term Capital Gains (LTCG): If you hold stocks or equity mutual funds for more than a year before selling, the profits are considered LTCG.
- Short-Term Capital Gains (STCG): If you sell within a year, your gains are treated as STCG.
LTCG Tax Rates
- Profits up to ₹1.25 lakh in a financial year are tax-free.
- For profits beyond ₹1.25 lakh, the tax rate is 10% if the sale occurred before 23rd July 2024 and 12.5% if the sale happens after this date.
This rate applies only if the transactions occur through recognised stock exchanges where the Securities Transaction Tax (STT) is paid. If shares are transferred through an off-market transaction (without STT), the LTCG tax is 20%.
STCG Tax Rates
- The tax on short-term capital gains is 20% for shares sold after 23rd July 2024.
- If the sale happened before 23rd July 2024, the tax is 15%.
- If shares are sold via off-market transfers, STCG is taxed according to your income tax slab rate.
- This means if your annual income exceeds ₹15 lakh, you will fall into the 30% tax slab, and your STCG will also be taxed at 30%.
Taxation on Mutual Funds
Equity-Oriented Mutual Funds
- LTCG: 0% for gains up to ₹1.25 lakh; 10% tax before 23rd July 2024 and 12.5% after this date.
- STCG: 15% before 23rd July 2024; 20% after this date.
To qualify as an equity-oriented mutual fund, at least 65% of the fund’s investments must be in equities.
Debt Mutual Funds
- LTCG: Earlier, investors could benefit from indexation, but from April 1, 2023, debt funds are taxed as per your income slab rate.
- STCG: Profits from debt funds held for less than 2 years are taxed according to your slab rate.
Understanding Indexation
Indexation helps adjust the purchase price of an asset for inflation. This benefit was previously available for debt mutual funds and real estate.
However, from 23rd July 2024, indexation applies only to real estate investments made before this date. Investors must choose between:
- The old regime – 20% tax with indexation.
- The new regime – 12.5% tax without indexation.
Example:
- Purchase price: ₹10,00,000 (bought in 2015)
- Sale price: ₹30,00,000 (sold in 2025)
- Indexed purchase price (adjusting for inflation): ₹15,12,500
- LTCG under the old regime: ₹14,87,500, taxed at 20% = ₹2,97,500
- LTCG under the new regime: ₹20,00,000 taxed at 12.5% = ₹2,50,000
In this case, the new regime results in lower taxes.
Tax on Gifts & Off-Market Transfers
If you receive shares as a gift from a relative, it is not considered a taxable transaction. However, if shares are transferred via an off-market sale, it is taxed at 20% LTCG.
Who qualifies as a relative (for tax-free gifts)?
- Spouse
- Siblings
- Parents and their siblings
- Lineal ascendants or descendants (grandparents, children, grandchildren)
Tax Deduction at Source (TDS)
- Dividends: Companies deduct TDS on dividends at 10% (for Indian residents) before paying investors.
- Non-resident investors: TDS is deducted based on DTAA (Double Taxation Avoidance Agreement).
Advance Tax on Capital Gains
If you earn short-term capital gains or business income from trading, you must pay advance tax in instalments:
- 15% by 15th June
- 45% by 15th September
- 75% by 15th December
- 100% by 15th March
If you fail to pay advance tax, you may have to pay interest at 12% per year.
Conclusion
Taxation plays an important role in shaping your investment returns, and staying updated on the latest tax policies can help you make informed financial decisions. Whether you are investing in stocks or bonds understanding how different tax rules apply to your earnings ensures that you remain compliant while optimising your tax liability.
By leveraging strategies like tax-loss harvesting, choosing the right investment duration, and making use of exemptions, you can minimise the impact of taxation on your profits. If you take a proactive approach to managing your tax obligations, you can not only safeguard your wealth but also grow it efficiently over time.
FAQs
Can I offset capital gains with capital losses?
Short-term losses can offset both STCG and LTCG. Long-term losses can only offset LTCG, reducing your tax liability.
How is tax calculated on Systematic Investment Plans (SIPs)?
Each SIP instalment is considered a separate investment. LTCG or STCG applies based on individual holding periods.
How are foreign stock investments taxed?
Foreign stocks are taxed like debt funds. STCG is taxed as per your slab rate, while LTCG is 12.5% after 24 months.
What if I do frequent stock trading?
If trading is your main income source, gains must be declared as business income. This means you’ll be taxed according to your income slab.
