Someone spends a year doing three things with the same trading account. They buy shares and hold them. They buy and sell a few on the same day. And they try their hand at options for a couple of months.
At the end of the year they treat it as one activity, because it happened in one account, on one app, with one login.
The tax system does not see one activity. It sees three, taxed under different rules, reported in different places, with different consequences if you lose money. Getting that wrong is the most common reason an ordinary investor receives a notice.
So the first question is not what rate you pay. It is which bucket you are in.
Three buckets
Shares you bought and held, then sold. This is a capital gain, taxed at fixed rates that do not depend on your income.
Shares you bought and sold on the same day. This is speculative business income, taxed at your slab rate.
Futures and options. This is non-speculative business income, also taxed at your slab rate.
The last two surprised people. Profits from futures and options are treated as business income, not capital gains, however long you hold the contract. And intraday sits in its own category despite looking identical to delivery on screen.
The rest of this post is mostly about the first bucket, because it is where most investors live. The other two are flagged where the differences bite.
Capital gains on shares and equity funds
One date decides everything: twelve months from purchase.
Sold within twelve months. Short term. Taxed at 20 per cent, plus 4 per cent cess (and surcharge, where applicable).
Sold after twelve months. Long term. Taxed at 12.5 per cent, plus 4 per cent cess (and surcharge, where applicable), and only on the amount above ₹1.25 lakh of long term gains in the year.
Those rates came in on 23 July 2024, replacing 15 and 10 per cent, and the exemption rose from ₹1 lakh to ₹1.25 lakh at the same time. Neither the Budget of 2025 nor the Budget of 2026 changed them. If you remember 15 and 10, you are remembering a system that no longer exists.
There is no indexation on equity. The gain is simply the sale price minus what you paid.
Equity mutual funds, meaning those holding at least 65 per cent in Indian equity, are taxed exactly like shares. Same twelve month line, same rates, same exemption.
Two details worth knowing
The exemption is annual and it does not carry forward. ₹1.25 lakh of long term gains each year escapes tax entirely, and an unused portion is simply lost when the year ends. People who hold for the long term but never sell anything often pay more tax eventually than people who realise a little each year.
Very old holdings get protection. For shares bought before 1 February 2018, your cost is treated as the higher of what you actually paid or the lower of the market value on 31 January 2018 and your sale price. Gains built up before that date were never meant to be taxed, and this is how that is preserved.
Not every fund is an equity fund
This is where people are caught out, because the word fund covers three things taxed quite differently.
Equity funds, meaning those holding at least 65 per cent in Indian equity, are taxed exactly like shares. Twelve month line, 20 and 12.5 per cent, and the ₹1.25 lakh exemption applies.
Debt funds, meaning those holding more than 65 per cent in debt and money market instruments, are taxed at your slab rate regardless of how long you hold them, if bought on or after 1 April 2023. There is no long term treatment and no indexation. A thirty per cent taxpayer pays thirty per cent, whether they held for a month or five years.
Everything in between is a third category people rarely realise exists. Funds that are neither equity heavy enough nor debt heavy enough get ordinary treatment: long term after twelve months if the units are listed, after twenty four if they are not, taxed at 12.5 per cent. Gold and silver ETFs sit here, and so do international funds.
There is a trap in that third category worth stating plainly. The ₹1.25 lakh exemption does not apply to them. It is available only on equity shares and equity oriented funds. A gold ETF gets the 12.5 per cent rate but not the tax free slice, and people routinely assume otherwise.
A second trap concerns funds that invest in other funds. Their treatment depends on their own allocation, not on what the funds underneath them hold. A fund of funds holding equity funds is not automatically taxed as equity.
And a caution for anyone reading older guidance. The rule defining which funds fall into the debt bucket was rewritten with effect from the 2025-26 year. Gold ETFs and international funds were caught by the previous test and are not caught by the current one. Material written for the two years before that describes a position that no longer applies.
Before buying anything described as a fund, it is worth knowing what it actually holds. That determines the tax, not the label on the app.
Dividends
Dividends are added to your income and taxed at your slab rate.
The company deducts tax at source at 10 per cent if it pays you more than ₹10,000 in a financial year, or 20 per cent if it does not have your PAN. That threshold was ₹5,000 until recently. Mutual fund payouts work the same way.
There is a detail here that catches people. The threshold applies per company, not across your whole portfolio. Hold ten companies each paying you ₹9,000 and no tax is deducted anywhere, but you still owe tax on ₹90,000 of dividend income. Nothing will remind you, and the shortfall surfaces at filing.
This all changed in 2020. Before that, dividends arrived tax free in your hands because the company had already paid tax on them. Anyone working from older advice will have this wrong.
Losses, and why the rules differ so much
This is the part that rewards understanding, because the rules are not intuitive and getting them right is worth real money.
Capital losses can be set against capital gains. Short term losses can offset either short or long term gains. Long term losses can only offset long term gains.
Intraday losses are the harshest treatment in the system. They can only be set against other speculative profits, not against salary, not against capital gains, not against derivative profits. Unused, they carry forward four years and expire.
Derivative losses get the most generous treatment. They can be set against any income except salary in the same year. Any unused loss carries forward eight years, but only against future business income.
One condition governs all of it. You must file your return by the due date. File late, even by a day, and the right to carry forward the loss is gone permanently. That single rule costs people more than any rate ever has.
Which form, and why it matters
If your only market activity is buying and selling shares or funds, you report capital gains and the process is straightforward.
The moment you have intraday or derivative activity, you are reporting business income, which means a different form, the ability to deduct trading expenses, and the possibility of an audit requirement at higher volumes.
Filing derivative activity as capital gains is a common mistake. It forfeits the expense deductions, forfeits the eight year loss carry forward, and can render the return defective.
One change that affects the words, not the numbers
India replaced its income tax law in 2025. The Income-tax Act, 2025 came into force on 1 April 2026, replacing the Act of 1961.
The rates did not change. Nor the holding periods, nor the ₹1.25 lakh exemption. What changed is the numbering of the sections and the vocabulary, with the new law using “tax year” in place of the older terms.
There is a timing point that catches people. Income earned during the year to March 2026 is still governed by the old Act, even though the return is filed after the new one commenced. The new Act governs income earned from April 2026 onward.
So if you are working from a guide, a calculator or an accountant’s note, check which year it describes rather than which year it was written in.
If you are just starting out
Four things worth doing, none complicated.
Keep your contract notes, filed by year. They are the evidence behind every number you will report.
Know which bucket each activity falls into before the year ends, not while filing.
File on time, particularly in a year you lost money, because that is when the deadline actually costs something.
And treat this post as a map rather than a manual. Tax on investments is genuinely intricate once your situation has more than one moving part, and a qualified professional is worth their fee the first time you have a real question.
Common questions
What is the tax on selling shares in India?
Twenty per cent if sold within twelve months of buying. Twelve and a half per cent if sold after twelve months, and only on long term gains above ₹1.25 lakh in the year. Both rates are before 4 per cent cess and any applicable surcharge.
Is there any tax free limit on long term gains?
Yes, ₹1.25 lakh of long term gains from listed shares and equity funds each financial year. It does not carry forward.
Are mutual funds taxed like shares?
Equity funds are, meaning those holding at least 65 per cent in Indian equity. Debt funds bought since April 2023 are taxed at your slab rate whatever the holding period.
Do I get indexation on equity gains?
No. It was removed for equity, so the gain is simply sale price minus cost.
How is intraday trading taxed?
As speculative business income at your slab rate. Losses can only offset other speculative profits and expire after four years.
How is F&O income taxed?
As non-speculative business income at your slab rate. Losses can be set against any income except salary in the same year, and any unused loss carries forward eight years against business income.
Are dividends taxable?
Yes, at your slab rate. Tax is deducted at source at 10 per cent where a single company pays you more than ₹10,000 in a year. Below that nothing is deducted, but the income is still taxable.
Does the ₹1.25 lakh exemption apply to gold ETFs?
No. It applies only to equity shares and equity oriented funds. Gold and silver ETFs get the 12.5 per cent long term rate but not the exempt slice.
What happens if I file my return late?
You lose the right to carry forward losses, permanently. Everything else can usually be corrected. That cannot.
Did the new Income Tax Act change my tax?
Not the amount. It renumbered the sections and changed some terminology from April 2026. Income earned before then is still governed by the old Act.
The short version
Which bucket you are in matters more than which rate applies, because the bucket determines the rate, the form, and what happens to your losses.
Delivery is capital gains. Intraday is speculative. Derivatives are business income. Sort that out first and everything else follows.
This post describes the general position and is not tax advice. Rates and rules change with each Budget, and individual circumstances vary.
Risk disclosure
Hem Finlease Private Limited, SEBI Registration No. INZ000167734. Hem Securities Limited, SEBI Reg. No. IN-DP-568-2021, CDSL: 17700/17701.
Investments in the securities market are subject to market risks. Read all the related documents carefully before investing. Registration granted by SEBI and membership of recognised stock exchanges do not guarantee the performance of the intermediary or provide any assurance of returns to investors.
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