Taxation of Equity Products: formula sheet

Key formulas

Holding period test

Held for 12 months or less → STCG; held for more than 12 months → LTCG

Applies to listed equity shares and units of equity-oriented mutual funds.

Capital gain

Capital gain = Full value of consideration − Cost of acquisition − Cost of improvement (if any) − Transfer expenses

Brokerage and similar sale expenses are deducted. STT is not deductible.

Grandfathered cost of acquisition

Cost = Higher of [Actual cost, Lower of (FMV on 31-1-2018, Sale value)]

Applies only to LTCG on assets acquired before 1 February 2018 (on or before 31 January 2018). The cost is capped at the sale value, so it cannot create a loss or increase one. A loss arises only if the actual cost is above the sale value.

Taxable LTCG

Taxable LTCG = Total LTCG in the year − Exemption limit

Tax is charged only if LTCG exceeds the annual limit. The limit is ₹1,25,000 for transfers on or after 23 July 2024 (₹1,00,000 before). The special LTCG rate applies where STT has been paid on sale (and on acquisition for listed shares, apart from notified exceptions). Use the limit and rate given in the question.

Equity-oriented fund test

Domestic equity shares ≥ 65% of total proceeds; for a fund of funds, ≥ 90% of proceeds invested in units of another equity-oriented fund

Meeting the test gives equity-share style capital gains treatment.

STT on equity delivery

0.1% of value on buyer AND 0.1% of value on seller

Both sides pay on delivery-based trades in listed equity shares.

STT on intraday equity

0.025% of sale value, seller only

The buyer pays no STT on a non-delivery trade.

STT on futures

0.02% of trade price, seller only

Applies to equity futures. The buyer pays nothing.

STT on options

0.1% of premium on sale; 0.125% of settlement price on exercise

The seller pays on sale. The buyer pays only if the option is exercised.

STT on equity-oriented MF units

0.001% of value on sale or redemption

No STT on purchase of units.

Concessional rates

STCG 111A = 20%; LTCG 112A = 12.5% on gains above ₹1,25,000

Need STT paid as the law requires. Long term means held more than 12 months.

STT and gains

Capital gain = Sale value − Cost − Transfer expenses (STT excluded)

STT is not deductible for capital gains. It is deductible if the income is business income.

Tax on dividend (resident individual)

Tax = Net dividend income × slab rate (plus surcharge and cess)

Taxed under Income from Other Sources. No special rate for dividends from equity or equity mutual funds.

Deduction against dividend

Maximum deduction = lower of interest expense and 20% × dividend income

Only interest is allowed. No other expense can be claimed.

Taxable dividend

Taxable dividend = Gross dividend − allowed interest deduction

Use gross dividend, before TDS, as the starting point.

TDS on dividend (resident)

TDS = 10% × dividend, if dividend in the year exceeds ₹10,000

Section 194 for company dividend, section 194K for mutual fund income. Threshold was ₹5,000 before FY 2025-26. Once the limit is crossed, TDS applies on the full amount.

Buyback (on or after 1 October 2024)

Deemed dividend = Full buyback consideration; Capital loss = Cost of acquisition

The dividend is taxed at slab rates. The loss can be set off only against capital gains.

Buyback before 1 October 2024

Company pays buyback tax; shareholder's receipt is exempt

Know the date. Questions test the change.

Intraday equity (no delivery)

Speculative business income

Taxed at slab rates. Reported as business income, not capital gains.

F&O on recognised exchange

Non-speculative business income

Futures and options are carved out of the speculative definition. Taxed at slab rates.

Speculative loss set-off

Speculative loss → only against speculative income

It cannot be set off against F&O income, salary, capital gains or other income.

Speculative loss carry forward

Up to 4 assessment years, only against speculative income

Return must be filed by the due date.

Non-speculative business loss set-off

Against any head except salary, in the same year

It can be set off against speculative income, capital gains, house property and other sources.

Non-speculative business loss carry forward

Up to 8 assessment years, only against business income

Return must be filed by the due date.

Turnover for F&O (audit test)

Turnover = Σ|profits and losses on each trade| + premium received on options sold

Add favourable and unfavourable differences as positive numbers. Reverse trades are included.

Turnover for intraday (audit test)

Turnover = Σ|profit or loss on each square-off|

Absolute values, so losses add to turnover.

Tax audit turnover limit

₹1,00,00,000; or ₹10,00,00,000 if cash receipts and payments are each 5% or less of the total

Apply the limit to business turnover. Confirm the cash condition before using the higher limit.

STCL set-off

STCL → STCG first, then LTCG

STCL can be set off against both short-term and long-term capital gains of the same year.

LTCL set-off

LTCL → LTCG only

LTCL cannot be set off against short-term capital gains.

Carry forward period

Up to 8 assessment years after the year of loss

Counted from the assessment year following the year the loss arose.

Nature retained

STCL carried forward remains STCL; LTCL carried forward remains LTCL

Carried forward STCL can be set off against STCG or LTCG; carried forward LTCL only against LTCG.

Filing condition

Return filed on or before the due date

Needed to carry forward a capital loss. Late return generally means the loss cannot be carried forward.

Head restriction

Capital loss ≠ set off against other heads

Salary, business and other income cannot absorb a capital loss.

Net taxable gain

Net gain = Gains − eligible losses (after set-off)

Exemption limit and special rates are applied after set-off.

ESOP perquisite

Perquisite = FMV on exercise date − exercise price paid

Taxed as salary in the year of exercise. Not taxed at grant or vesting.

ESOP cost of acquisition

Cost = FMV taken for perquisite on exercise date

Holding period runs from the date of allotment on exercise.

Bonus shares cost

Cost of acquisition = ₹0

Holding period runs from the date of bonus allotment.

Rights shares cost

Cost = price paid to the company

Holding period runs from the date of allotment of the rights shares.

Rights entitlement sold

Gain = sale price of entitlement − cost (₹0 if received free)

Short-term capital gain. Cost is the price paid if bought from another person.

IPO shares cost

Cost = issue price paid

Holding period runs from the date of allotment.

Listed equity long-term test

Holding period > 12 months = long term

Applies to listed equity shares. The period is counted from the allotment date.

Quick revision

• Listed equity shares and equity-oriented mutual fund units held for more than 12 months give long-term gains.
• Short-term gains on STT-paid equity are taxed at 20%. Long-term gains above ₹1,25,000 a year are taxed at 12.5%, without indexation.
• The ₹1,25,000 exemption applies to total long-term gains of the year on such assets, not to each sale.
• Grandfathering for assets acquired on or before 31 January 2018: cost = higher of actual cost and the lower of the 31 January 2018 FMV and the sale value.
• Dividends are taxed in the shareholder's hands at slab rates. Companies no longer pay dividend distribution tax.
• For buybacks from 1 October 2024, the whole buyback consideration is taxed as dividend in the shareholder's hands at slab rates. The cost of the bought-back shares is treated as a capital loss. This loss is short-term or long-term according to the holding period of the bought-back shares, and that decides what it can be set off against. It can be set off only against capital gains (not against the dividend) and carried forward under the normal capital loss rules.
• STT on equity delivery trades is 0.1% on both buy and sell. Check your workbook for the current intraday and derivative rates.
• Short-term capital loss can be set off against short-term and long-term gains. Long-term capital loss only against long-term gains. The same direction rules apply to carried-forward losses: a carried-forward long-term loss can be set off only against long-term gains of later years.
• Capital losses carry forward for 8 assessment years, and only if the return is filed by the due date.
• Intraday equity trading gives speculative business income. F&O gives non-speculative business income.
• Non-speculative business loss (including F&O) can be set off in the same year against income under any head except salary. The balance carries forward for 8 assessment years and can be set off only against business income.
• Speculative losses are set off only against speculative profit and carry forward for 4 years.
• ESOP: perquisite (FMV on exercise less exercise price) is taxed as salary, and FMV on exercise becomes the cost for later capital gains.

Common mistakes

• Using 36 months or 24 months as the long-term test for listed equity. Fix: For listed equity shares and equity-oriented funds the test is more than 12 months.
• Applying indexation to equity LTCG. Fix: Equity LTCG on listed shares and equity funds has no indexation. Use the grandfathered cost only.
• Charging STT on both buyer and seller for intraday trades. Fix: Only delivery is two-sided. Intraday, futures and options sale are seller-only.
• Deducting STT from capital gains. Fix: For capital gains, STT is not part of cost or transfer expenses. It is deductible only against business income.
• Saying dividends are tax-free for the investor or taxed through DDT. Fix: DDT ended from 1 April 2020. Dividends are taxed in the investor's hands at slab rates.
• Applying a 10% or 12.5% special rate to dividends from equity funds. Fix: Dividends and IDCW are taxed at slab rates. Special rates apply to capital gains from sale or redemption, not dividends.
• Treating intraday profit as short-term capital gain. Fix: If the trade is settled without delivery, it is speculative business income taxed at slab rates.
• Calling F&O income speculative. Fix: Derivatives on a recognised exchange are expressly non-speculative. Memorise this carve-out.
• Setting off LTCL against STCG. Fix: Repeat: LTCL only against LTCG. STCL is the flexible one.
• Saying capital losses are carried forward for 4 years. Fix: For capital losses the period is 8 assessment years.

Exam tips

• Memorise 12 months as the test for both listed equity shares and equity-oriented funds. It is the most tested number here.
• Read the purchase date first. If it is before 1 February 2018, expect a grandfathering calculation.
• Remember grandfathering cannot turn a gain into a loss and never applies to STCG.
• Eliminate any option using indexation for equity LTCG.
• For transfers on or after 23 July 2024, the figures are STCG 20%, LTCG 12.5% and exemption ₹1,25,000. Rates and limits change in Budgets, so use the figures given in the question.
• Memorise the rate table as product, side and base. Many MCQs test only who pays.
• Watch for words like 'seller', 'premium' and 'exercise'. They change the answer.
• Whenever a question mentions STT and deduction, check the head of income first.