“₹7 lakh in trading gains, ₹74,000 tax hit.” Sounds like a bad dream, right? For thousands of Indian investors, it’s a brutal reality. Many are learning the hard way that a profit under ₹12 lakh doesn’t automatically mean tax exemption.
Sujit Bangar, founder of TaxBuddy.com, recently highlighted a case that perfectly illustrates this common pitfall. A full-time investor, with ₹7 lakh in net market profits, assumed he had zero tax liability. Instead, he got slapped with a ₹74,375 tax bill. Bangar’s warning is sharp: “Don’t confuse low income with low tax. Understand how each income is classified—and taxed.”
The investor’s ₹7 lakh gain was a mix: ₹3 lakh in intraday losses, ₹2.5 lakh in futures & options (F&O) gains, ₹3.5 lakh in short-term capital gains (STCG), and ₹4 lakh in long-term capital gains (LTCG). He thought the total, being under ₹12 lakh, would be tax-free. He was wrong.
Why Income Classification Matters
Here’s the crucial breakdown of how different market incomes are taxed:
- Intraday Trades: These are speculative business income. They’re taxed at your slab rates, and losses can only be set off against other speculative profits. You can carry forward these losses for 4 years.
- F&O Trades: Classified as non-speculative business income, these are also taxed at slab rates. The good news is they offer broader options for setting off losses, and you can carry them forward for 8 years.
- Short-Term Capital Gains (STCG) from Equity: These gains are taxed at a flat 20% under Section 111A. If you have STCG losses, you can use them to offset both short-term and long-term gains.
- Long-Term Capital Gains (LTCG): Under Section 112A, you get an exemption for LTCG up to ₹1.25 lakh. Any gains beyond that are taxed at 12.5%. There’s no indexation benefit or Section 87A rebate here.
Bangar stresses that the biggest mistake investors make is treating all market income as one big pool. “What got him in trouble wasn’t profit—it was classification.”
This warning comes at a time when millions of Indians are diving into stock and derivatives trading via mobile apps, often without understanding the tax implications.
So, the next time you’re celebrating market gains, remember Bangar’s clear message: “Tag someone who trades but thinks ₹12L = ‘tax-free zone.’” Market success means nothing if it ends in a tax shock.