Tax on Stock Market Gains in India — LTCG, STCG, Dividends and F&O (FY 2026-27)
The rulebook, minus the jargon
The tax system treats your market activity as four different people: the investor (delivery equity), the income-collector (dividends), the trader (F&O), and the speculator (intraday). Each is taxed differently, and most expensive mistakes come from not knowing which one you were being on a given trade.
One housekeeping note up front: India’s income-tax law was re-enacted as the Income-tax Act, 2025, effective from 1 April 2026 — the old familiar section numbers changed, and “previous year” and “assessment year” gave way to a single tax year, but the rates below carried over unchanged, and the Finance Act 2026 left them alone. We therefore quote rates, not section numbers, as applicable for tax year 2026-27 (April 2026 to March 2027). Returns being filed in 2026, for FY 2025-26, still fall under the old 1961 Act.
The master table — listed equity and equity mutual funds
| Your situation | Holding period | Tax |
|---|---|---|
| Long-term capital gains (LTCG) | More than 12 months | 12.5% on gains above ₹1.25 lakh per year |
| Short-term capital gains (STCG) | 12 months or less | 20% flat |
| Dividends | — | Added to income, taxed at your slab; 10% TDS if a company pays you over ₹10,000 in the year |
| Intraday (no delivery) | — | Speculative business income, at slab |
| F&O | — | Non-speculative business income, at slab |
Two design features worth noticing. First, the ₹1.25 lakh LTCG exemption is an annual gift — more on harvesting it below. Second, the 7.5-point gap between STCG (20%) and LTCG (12.5%) is the state literally paying you to hold for a year.
LTCG in practice — a worked example
You invested ₹6 lakh in 2023; today it is worth ₹11 lakh and you sell after 12+ months.
- Gain: ₹5,00,000
- Exempt slice: ₹1,25,000
- Taxable: ₹3,75,000 × 12.5% = ₹46,875 (plus cess)
Effective tax on the whole gain: ~9.4%. Long-term equity remains one of the most tax-gentle incomes in India — gentler than salary, rent, or FD interest at most slabs.
(Legacy footnote: for shares bought on or before 31 Jan 2018, the “grandfathering” rule lets you use that date’s price as your cost — old portfolios should compute both ways.)
The ₹1.25 lakh harvest — legal, simple, annually repeatable
Because the exemption resets every financial year, a patient investor can book up to ₹1.25 lakh of long-term gains tax-free each March and immediately repurchase the same holdings. This resets your cost upward, shrinking the taxable gain of the eventual final sale.
Example: 20 years of SIP compounding (the arithmetic is in our SIP guide) can build ₹70+ lakh of gains. Harvested annually, up to ₹25 lakh of that exits the tax net entirely — roughly ₹3 lakh of tax saved for an hour of clicking per year. The repurchase changes your holding date, so harvest only positions you are years away from selling anyway.
Losses are assets — if you file properly
- Short-term losses set off against short-term and long-term gains.
- Long-term losses set off against long-term gains only.
- Unused capital losses carry forward eight years — but only if you file your ITR by the due date for the loss year. Miss the deadline, lose the shield permanently.
- Intraday (speculative) losses set off only against speculative gains (four-year carry-forward). F&O losses, being non-speculative business losses, set off more broadly — one reason serious F&O activity belongs in professional hands with proper books (and, above turnover thresholds, audit).
The practical habit: every March, look at what is down alongside what you harvested up — selling a loser you no longer believe in shelters a winner you do.
Dividends and buybacks
Dividends land at your slab rate — which makes high-dividend strategies (a 5%-plus yielder like Coal India) most efficient for low-slab holders and least for the 30% bracket, where growth compounding beats payout collecting after tax. The 10% TDS above ₹10,000 per company per year appears in your AIS — reconcile it, it is prepaid tax, not extra tax. From 1 April 2026 you can no longer deduct interest on money borrowed to buy the shares (or mutual fund units) from that income: the Finance Act 2026 removed the old allowance of up to 20% of the dividend, so a leveraged dividend portfolio is taxed on the gross payout.
Buybacks are taxed as capital gains again. For buybacks from 1 April 2026, the Finance Act 2026 taxes only your profit — the buyback price minus your cost — as a short- or long-term capital gain, at the 20% or 12.5% rates that apply to listed shares, instead of treating the whole payout as dividend at slab. Promoters pay an additional tax that takes their rate on the gain to 30% (22% where the promoter is a domestic company), before surcharge and cess. Buybacks between October 2024 and March 2026 stay under the old rule: the full proceeds were dividend income at your slab, and the cost became a separate capital loss that follows the set-off and carry-forward rules above. The holding period now decides the rate, so check it before tendering.
Filing: which form, what to reconcile
- Capital gains (investor + dividends), for the FY 2025-26 returns filed this year: ITR-2.
- Any F&O or intraday activity, for the same returns: ITR-3 (business income).
- Before filing, download the AIS/TIS — every broker trade, dividend and TDS entry is already reported to the department; your return must reconcile with it. Brokers issue ready capital-gains statements; the days of the taxman not knowing are a decade gone.
- STT (the tiny tax charged on every trade — 0.1% on delivery each side) is what qualifies your gains for these concessional rates; it is not otherwise creditable.
Five expensive tax mistakes
- Selling at month 11. Waiting weeks converts 20% into 12.5% + exemption. Check the calendar before the sell button.
- Wasting the ₹1.25 lakh exemption year after year by never harvesting.
- Filing late in a loss year — vaporises up to eight years of set-off value.
- Treating F&O as “gains” — it is business income with different forms, books, and sometimes audit; the tax return is where casual derivative dabbling gets truly expensive.
- Ignoring the AIS — mismatches between broker-reported data and your return are the most common notice trigger for retail investors.
FAQ
How much tax do I pay on stock market profits in India? For listed equity: 12.5% on long-term gains above ₹1.25 lakh a year (held >12 months), 20% on short-term gains. Dividends and any F&O/intraday income are taxed at your slab.
Is ₹1.25 lakh of LTCG really tax-free every year? Yes — per financial year, across all your listed equity and equity mutual funds combined. Harvesting it annually is legal and, for long-horizon investors, close to free money.
Do I pay tax if I don’t sell? No. Unrealised gains are untaxed — one more structural reward for the buy-and-hold approach every valuation and SIP principle on this site points toward.
How is F&O income taxed? As non-speculative business income at your slab, filed with books of account (and audit above thresholds). Losses set off against most other income except salary.
Did the new Income-tax Act 2025 change these rates? No — the 2025 Act (effective 1 April 2026) reorganised and renumbered the law, and the capital-gains rates above carried over unchanged for tax year 2026-27; the Finance Act 2026 kept them too. Two changes it did make: buybacks are taxed as capital gains again from 1 April 2026, and interest can no longer be deducted against dividend income.
This guide is education, not tax or investment advice. We are not SEBI-registered advisers or tax practitioners. Rates reflect the law as generally applicable to resident individuals for tax year 2026-27 as of 24 September 2026; surcharge, cess, residency and special situations change outcomes — confirm with a chartered accountant before filing.