Taxation

How Indian tax treats investing and trading: the two Acts, how income combines across heads, capital-gains rates, set-off, audit and filing.

What you trade, how long you held it, whether you are an individual or a firm, when you realise the gain or loss, and which tax year it falls in all change the final number. A profit, a loss and a traded value are three different numbers, and none of them is a tax figure on its own.

This is an educational overview, not tax advice. Tax rules are high-stakes and they change. Everything here was checked against the sources named at the foot of the page, and the statutory position moves between Acts. Confirm your own numbers with a chartered accountant before you file, and read the current year’s notified forms rather than a summary of them.

Two Acts, and which one governs you

The Income-tax Act, 2025 applies from 1 April 2026. The 1961 Act stands repealed from that date, but its provisions continue to govern every tax year that began before it. So there are two live periods:

The 2025 Act retires two pieces of vocabulary that caused decades of confusion. “Previous year” and “assessment year” are replaced by a single “tax year”, aligned to the financial year. Section 536(3) reads any reference to a tax year on or before 1 April 2025 as the corresponding previous year under the old Act, so an old reference does not change treatment.

The rewrite is structural, not a new tax burden. SEBI-style clarity aside, the Department’s own position is that the 2025 Act imposes no new tax. It contains 536 sections against the 1961 Act’s 819, and the Rules fall from 511 to 333. Much of the reduction is drafting: explanations folded into sections, tables instead of narrative. Renumbering is not proof that a rule changed, and the department says so. Capital gains moved from section 112A to 198, short-term gains from 111A to 196, the new regime from 115BAC to 202, and presumptive taxation from separate 44AD/44ADA/44AE sections into one section 58. Ordinary TDS moved from 194C to 393.

Two practical consequences. Rights, options and liabilities that arose under the old Act continue, so a choice you made before April 2026 carries over to the equivalent provision. And the two Acts run in parallel: a return for AY 2026-27 is filed under the old Act, while advance tax for Tax Year 2026-27 is paid under the new Act from June 2026.

Capital gains

A capital gain is a profit from selling a capital asset. Two things decide the rate: what the asset is, and how long you held it.

Two traps in that table.

Listed bonds and specified debt funds are not one row. Whether a debt mutual fund is long-term depends on its holding period and on the definition of the specified category applying on the acquisition date, and that definition was revised with effect from 1 April 2026. A fund that was specified under the old rules and one specified under the new rules can differ. Check the fund’s own classification and the date you bought it rather than assuming all debt funds behave alike. Indexation is not available where a special rate applies, and on other assets it depends on long-term status and acquisition date, so do not assume either way.

20% is not the short-term rate for everything. It is the special rate for eligible STT-paid listed equity and equity-fund transactions. Other short-term gains sit at slab or another applicable rate, and residency, asset class and transfer date all matter.

The ₹1.25 lakh threshold is still there

Eligible long-term gains on listed equity, equity funds and business trust units are exempt up to ₹1.25 lakh a year. The 12.5% applies only to the amount above it, subject to the STT and asset-eligibility conditions.

An earlier version of this page said the threshold had been removed. It has not. The threshold was raised from ₹1 lakh in Budget 2024 and remains.

Eligible LTCG            ₹2,00,000
Annual threshold       − ₹1,25,000
Taxable at 12.5%          ₹75,000
Base tax at 12.5%         ₹9,375

That ₹9,375 is the base special-rate tax. Applicable cess, surcharge and any other adjustments come after it, and loss set-off changes what is left to tax. Two things the threshold is not: it is one annual amount aggregated across eligible gains, not ₹1.25 lakh per security, and it is not the section 87A rebate, which is a separate mechanism that applies to total income.

Trading income is business income

This is where classification matters most, because it decides the rate, which losses can absorb it, and which form you file.

There is no fixed rate on business income. Profit is added to your other income and taxed at your marginal rate, so a profitable trader can pay more than expected while the same profit booked as a capital gain would have been taxed at a special rate.

Delivery trades are the genuinely arguable case, and this page will not pretend otherwise. Whether a delivery sale is a capital transaction or business stock-in-trade turns on holding intention, frequency, and the applicable guidance, not on the word “delivery”. An individual, a partnership firm and a company can each face a different business-income rate, so the taxpayer category is part of the answer.

How salary and other income are taxed together

Most people reading a trading chapter also have a salary. The two meet at one point: a single annual computation, not separate bills.

Five heads of income, and you can earn under more than one in the same tax year. Salaries, income from house property, profits and gains of business or profession, capital gains, and income from other sources.

Special rates do not mean separate from your income. Capital gains and VDA income form part of total income; each is then taxed under its own provision rather than at your slab. The distinction is about the rate, not about isolation.

A simplified example

Salary after deductions ₹12,00,000, net F&O profit ₹2,00,000, bank interest ₹50,000, eligible equity LTCG ₹2,00,000:

Salary                     ₹12,00,000
F&O profit                  ₹ 2,00,000
Bank interest               ₹   50,000
Income at slab rates       ₹14,50,000

Equity LTCG                ₹ 2,00,000
Annual threshold         − ₹ 1,25,000
At 12.5%                    ₹   75,000

Hypothetical and simplified. A real computation also involves allowable deductions and losses, rebate eligibility, surcharge and cess, the regime chosen, and statutory restrictions that apply to special-rate income. Read the ₹9,375 as the base on that one component, not as a total.

The interaction people miss

A current-year F&O loss cannot be set off against your salary. It can generally reach other income under other heads, including capital gains, but not salary. Once brought forward, its reach narrows to eligible business income. The set-off matrix sets that out in full.

Your employer’s TDS does not reach your trading. It may cover the salary tax and nothing more, leaving trading, interest and capital-gains tax unpaid, which is what makes advance tax or self-assessment tax payable. You can disclose eligible other income and permitted losses to your employer for TDS purposes under the applicable rules, but the employer’s withholding calculation is not your return. See which return form and filing.

The regime choice applies to the slab income, not to the special rates. Choosing old or new changes the slab, the deductions available against it, rebate eligibility and the final tax liability on that ₹14,50,000. Capital gains and VDA income stay under their own provisions either way. See regime choice.

Loss set-off, and why the loss you are carrying decides the answer

Two things are routinely confused: which income a loss may offset, and how long it may be carried forward.

Capital losses cannot offset salary, interest or ordinary business profits. They are confined to the capital gains head. That is the rule most often stated backwards: an earlier version of this page claimed long-term and short-term losses each offset both kinds of gain, which is not how it works. A short-term loss has the wider reach; a long-term capital loss is narrower and cannot offset a short-term gain.

A current-year trading loss and a carried-forward trading loss are not the same instrument. A current-year non-speculative business loss can generally reach income under other heads including capital gains, but not salary. Once it is brought forward, its reach narrows to eligible business income. The narrowing happens on carry-forward, not on realisation.

Carry-forward depends on filing on time. A loss you cannot set off is generally carried forward only if the return claiming it is filed by the statutory date. No loss can be carried back, but a carried-forward loss is not worthless: it can reduce tax in a later year if you have the gains or business income to absorb it, inside the eight-year window.

Tax-loss harvesting

Harvesting means realising an eligible capital loss so it can offset a gain. The arithmetic is the whole argument.

• A realised loss offsets a gain. An unrealised one does nothing. A position sitting at a loss creates no tax benefit at all until you sell.
• The loss is only worth what it can absorb. Realise ₹2,00,000 of loss in a year with no gains and you have a loss you must carry, at a cost, for up to eight years.
• Only incremental costs count. If you were going to sell anyway, that sale’s charges were not caused by harvesting.
• You change your exposure. Selling and not repurchasing leaves you in cash. This is a risk decision, not a tax decision.

Worked example

Realised eligible capital loss ₹20,000, at a hypothetical effective marginal benefit of 20%, with ₹600 of incremental transaction and execution costs:

Capital loss realised       ₹20,000
Tax benefit at 20%          ₹ 4,000
Incremental costs          − ₹   600
Net immediate benefit       ₹ 3,400

The 20% is illustrative and depends on which gain the loss offsets. A loss absorbing a 12.5% long-term gain is worth less than one absorbing a 20% short-term gain, and a loss you cannot use this year is worth nothing now.

The tax calculator covers slab rate, the ₹1.25 lakh equity threshold, long-term and short-term gains, the regime choice, advance tax and presumptive-tax figures. It does not model loss harvesting, and it does not compute interest under the deferred-payment provisions, so the arithmetic above is the reference for those, not the calculator.

An earlier version of this page asserted that delivery round trips cost about 0.2% and intraday about 0.05 to 0.1% of turnover, and that losses below 2 to 3% of position value were uneconomic. Those figures were unsupported. What actually breaks even is simple: at a 20% rate, a round trip costing 0.2% of turnover needs a loss above roughly 1% of position value to pay for itself, and one costing 0.3% needs about 1.5%. Your actual rate depends on your broker, segment, instrument and the statutory charges in force, and What It Costs sets out what those are.

On wash sales: India has no general 30-day rule of the kind the US applies. Say that carefully rather than absolutely. Genuine transfers, anti-avoidance provisions and the actual facts of a transaction still matter, and no part of this page should be read as advice to create transactions in order to manufacture a deduction.

Virtual digital assets

Separate from everything above, and the most restrictive treatment on this page.

• 30% flat rate on income from a transfer of a virtual digital asset, under section 115BBH of the 1961 Act, plus surcharge and 4% cess, so about 31.2% before surcharge.
• No slab benefit, and no indexation. The rate does not depend on your income level.
• Only the cost of acquisition is deductible. Expenses are not.
• Losses cannot be set off against any other income, and cannot be carried forward. A loss on one asset does not shelter a gain on another.
• 1% TDS under section 194S on the consideration, reported in Schedule VDA.

TDS is a credit against your final liability, not an extra tax on top of it. Where your actual rate is above 1%, the difference is still payable.

One classification we are not going to guess at. Whether a crypto futures or perpetual contract is taxed as a transfer of a VDA or under some other treatment depends on the product and the legal facts. Cash-settled derivatives and an actual transfer of an asset are not automatically the same thing. Treat that as unresolved rather than settled, and see the crypto market lesson for what the products actually are.

Advance tax, and the dates that create interest

Advance tax is not a business-only rule. It applies to any income that TDS has not already collected, which includes capital gains, rent, and interest or dividends where TDS fell short of your final rate.

These are cumulative targets, not additional amounts. By 15 September you should have paid 45% in total, not 15% plus 45%.

The general threshold is a liability of ₹10,000 or more after applicable credits. The practical test:

Is my liability ₹10,000 or more after TDS, and am I exempt from the relief below? If yes, advance tax is due on the shortfall.

Who pays nothing. A person whose final liability is already covered by TDS has no shortfall, which is the real reason a salaried investor with a large capital gain can owe advance tax while a salaried trader with modest gains may owe none. Separately, a resident senior citizen with no business or professional income is exempt from advance tax by its own statutory relief. An earlier version of this page attributed a general salary-only exemption to section 209(1)(d), which does not establish that. It is the TDS-coverage shortfall, plus the senior citizen relief.

Interest, and why the arithmetic is not simply 12% a year

Section 234B of the 1961 Act, now section 424 of the 2025 Act, charges interest at 1% per month on the shortfall where advance tax paid is less than 90% of the assessed tax.

Section 234C, now section 425, charges interest instalment by instalment, at 3% per month on the shortfall for the June, September and December instalments and 1% for March, counted in the months it remains unpaid. That is a statutory calculation over months, not an annual rate you can restate as 12%.

A gain that arrives late. If you realise a large capital gain in February, you could not have funded it in June. There is statutory relief for certain capital gains and other unpredictable income where the tax is paid within the remaining instalments or by the final date. This narrows the interest; it does not promise to remove all of it. Paying a larger amount later does not retroactively erase interest that had already accrued on an earlier shortfall.

Tax audit, and presumptive taxation

An earlier version of this page said audit is required above ₹5 crore of turnover. That was wrong in both directions.

The general business threshold is ₹1 crore of turnover. It rises to ₹10 crore only where both conditions are met: cash receipts not more than 5% of total receipts, and cash payments not more than 5% of total payments. Fail either test and the threshold returns to ₹1 crore. This is a tax audit under section 44AB of the 1961 Act; it is separate from any statutory company audit.

Presumptive taxation is not a 6% floor. Under section 44AD, consolidated into section 58 of the 2025 Act, presumptive income is 8% of turnover, or 6% where the specified cash condition is met, subject to eligibility conditions and a turnover limit. A declared profit below the presumptive rate is what can trigger an audit consequence, not a general obligation to report at least 6%. Whether the scheme is available to your F&O activity, and what happens if you opt out, needs checking against current law rather than assumed, and it does not replace proper profit-and-loss accounting.

Turnover for this purpose is not the sum of your contract notionals. It is computed on the absolute value of favourable and unfavourable transaction differences, with option premium treated separately and carefully, under the ICAI Guidance Note on Tax Audit. That is a different figure again from traded value, which is what What It Costs is about, and the two must not be conflated:

Which return form

Eligibility comes from the notified forms for the year, so check the current year’s instructions rather than a summary.

Two corrections to what this page used to say. An ITR-1 filer is not barred from claiming a section 87A rebate; eligibility depends on income and other conditions. And ITR-1 is no longer closed to all capital gains: for AY 2026-27 the notified form allows eligible 112A gains up to ₹1.25 lakh. It still excludes short-term capital gains, business income, more than two house properties, foreign assets, and being a company director or a holder of unlisted equity shares. ITR-4 is not automatic just because presumptive income exists; every form condition has to be met.

A trader generally files ITR-3, or ITR-4 where presumptive conditions are met. Filing income under the wrong head to avoid business-income treatment is a mismatch that invites scrutiny.

Filing, and why a loss year is not automatically a filing obligation

Filing obligations follow the statutory tests: income, transactions, assets and reporting duties. “Filing is mandatory even if you have only F&O losses” was too absolute.

Even where filing is not otherwise required, a timely filed return is what lets an eligible loss be carried forward, and a late return can cost you the carry-forward. Filing does not, however, make a claimed loss allowable; the claim still has to be correct.

Records, expenses and reconciliation

What to keep. Contract notes and trade-level records. The broker’s P&L statement, which is a starting point and not an authority. Your own trading ledger. Bank statements, demat statements, Form 26AS and AIS for TDS, TDS certificates, advance-tax challans, prior-year loss statements, and an audit report where one is required.

What can be deducted. Eligible business expenditure may reduce taxable business income, subject to the law: brokerage and exchange charges, data subscriptions, research and software. Personal spending is not deductible. Do not assume STT or CTT is deductible in every situation, since capital gains and business income are treated differently. Not every technology purchase can be deducted in full at once; capital and revenue treatment differ.

What you must reconcile. Delivery gains, intraday speculative results, F&O results, dividends, interest, VDA income, transaction charges, TDS credits and advance tax. AIS and Form 26AS will not contain your business expenses or your tax-turnover calculation, so neither is a substitute for your own records.

Regime choice

Choosing between the default regime (section 202 of the 2025 Act, previously 115BAC) and the old one changes your slab rates, deductions, rebate eligibility and how business income is treated. Certain capital gains and VDA income keep their special rates in either regime and do not simply become ordinary slab income. An option exercised under the old Act carries over to the equivalent provision, so you do not re-choose on transition. Availability and the consequences of switching are constrained for taxpayers with business income, so this is not a free annual choice.

Sources and currency

Checked 14 October 2026 against the Income Tax Department’s Objective and scope of the New Act FAQ (the transition, section 536, the tax year concept, the 536-versus-819 section count, and the 194C-to-393 mapping), the ITR-1 Sahaj form for AY 2026-27 and the ITR-1 FAQ (eligibility including 112A gains up to ₹1.25 lakh, and the disqualifications), the Department’s capital gains guidance (section 112A, 12.5% above ₹1,25,000), section 115BBH (the 30% VDA rate), the small-business benefits guidance (44AB thresholds and the 44AD 6% and 8% rates), the resident senior citizen advance-tax exemption guidance, and professional guidance for the renumbered interest provisions.

Limits of that verification. The 2025 Act’s renumbering of the advance-tax and interest provisions is taken from professional secondary sources, not read from the Act’s text, and no correspondence between 1961 and 2025 section numbers should be assumed without checking. The revised definition of specified debt mutual funds effective 1 April 2026, the availability of presumptive taxation to F&O specifically, and the treatment of crypto derivatives versus VDA transfers are points this page flags as unresolved rather than asserts. Those are the places to check with a chartered accountant.

Next: SEBI and investor protection.