Investing in stocks and mutual funds continues to attract millions of Indians, but the way profits are taxed has changed significantly.
Since July 23, 2024, the government has tightened capital gains taxation, impacting both casual investors and active traders. Short-term capital gains (STCG) from listed equities are now taxed at 20%, while long-term gains (LTCG) above Rs 1.25 lakh attract a 12.5% tax. These new rules mean that planning your sales, reinvestments, and ITR filings has become critical for optimising post-tax returns.
Investor vs. trader
Tax expert Sujit Bangar, founder of TaxBuddy, illustrated this through two of his clients, Ramesh and Suresh. Both earned Rs 10 lakh in the stock market. Yet their tax treatment differed sharply: Ramesh was classified as an investor, while Suresh was treated as a trader.
This distinction is crucial because India has over 11.8 crore market participants, but the tax head under which your income is reported changes everything-forms, rates, deductions, and audit requirements.
Investors include those holding stocks, mutual funds, or bonds for capital appreciation.
Traders are those in intraday equity, futures and options (F&O), or active delivery-based trading.
ITR filing deadlines
For FY 2024-25 (AY 2025-26), key dates are:
Non-audit cases: September 15, 2025
Audit cases: October 31, 2025
Additionally, returns must be e-verified within 30 days of filing to be valid.
Choosing the correct ITR form
ITR-1: For individuals with income ≤ ₹50 lakh and LTCG up to ₹1.25 lakh (subject to other conditions).
ITR-2: For investors reporting only capital gains.
ITR-3: Mandatory for traders or those with business income, including F&O and intraday.
If you both invest and trade, file ITR-3 and disclose both streams of income.
Tax rates post-July 2024
LTCG on listed equity (Sec 112A): 12.5% (above ₹1.25 lakh)
STCG on listed equity (Sec 111A): 20%
Securities Transaction Tax (STT) and other conditions remain applicable.
Business Classification and Loss Rules
Intraday equity: Speculative business income (Sec 43(5))
F&O trades: Non-speculative business (Sec 43(5) proviso)
Capital market investing: Capital gains head
Losses must be filed on time to be carried forward:
Speculative losses: Offset only against speculative gains; carry forward 4 years.
Non-spec business losses: Offset against business income; carry forward 8 years.
Capital losses: Short-term can offset both STCG and LTCG; long-term only against LTCG; carry forward 8 years.
Audit Thresholds
Turnover > ₹1 crore → audit mandatory.
If cash receipts and payments ≤ 5%, audit applies only if turnover exceeds ₹10 crore.
Deductible expenses for traders
Traders filing ITR-3 can claim expenses such as brokerage, statutory charges (excluding STT), data feeds, internet, trading platforms, and even depreciation on laptops-provided invoices and proper books are maintained under Sec 44AA/Rule 6F.
Don’t miss these schedules
Investors: Schedule CG, reconcile AIS/TIS.
Traders: P&L (Schedule BP), balance sheet, nature of business codes (e.g., 21009/21010), GST if applicable.
Crypto assets: Schedule VDA.
Foreign holdings: Schedule FA.
Capital gains taxation
When it comes to equity shares and mutual funds, taxation rules have their own set of nuances. Any gains from specified mutual funds (bought on or after 1 January 2023) and market-linked securities are treated as short-term capital gains, regardless of how long you hold them. Deductions are also limited-you cannot claim the Securities Transaction Tax (STT), and indexation benefits are not available on equity-related long-term capital gains.
For individuals, the Section 87A rebate provides relief; income up to Rs 5 lakh under the Old Regime and Rs 12 lakh under the New Regime is tax-free. But capital gains taxed at special rates are excluded, meaning you could still owe tax even if your total income is below these thresholds. On the positive side, the surcharge on capital gains from listed equities, equity mutual funds, or business trust units is capped at 15%, unlike higher surcharges on other income.
For NRIs, no basic exemption applies-capital gains are taxed in full. However, relief is available under Section 54EE, allowing exemption of up to Rs 50 lakh if the gains are invested in government-recognised startup funds within six months. Losses also follow specific rules: short-term losses can offset any gains, while long-term losses only offset long-term gains, both carry forward for up to eight years.