Taxation (NISM XXI-A): formula sheet

Key formulas

Capital gain

Capital gain = Sale value − (Cost of acquisition + Transfer expenses)

Brokerage and similar costs of sale reduce the gain. STT is not deductible.

Holding period for listed securities

Long-term if held for more than 12 months; otherwise short-term

Applies to listed shares, equity MF units, listed bonds. Unlisted shares and most other assets need more than 24 months.

Listed equity with STT paid

STCG tax = 20%; LTCG tax = 12.5% × (LTCG − ₹1,25,000)

The ₹1,25,000 exemption is for the whole financial year, not per share. Surcharge and cess extra.

Other long-term gains

LTCG tax = 12.5% without indexation

Applies to listed bonds and similar assets. Indexation is not available on securities.

Deemed short-term debt funds

Gain taxed at slab rate regardless of holding period

For specified debt mutual fund units bought on or after 1 April 2023, and market linked debentures.

Set-off of losses

STCL → STCG or LTCG; LTCL → LTCG only

Capital losses cannot be set off against other income such as salary.

Carry forward of losses

Carry forward up to 8 assessment years, against capital gains only

The return must be filed by the due date.

STT on equity delivery

0.1% on buy value and 0.1% on sell value

Intraday sell side is 0.025%. STT is not deductible when computing gains.

Capital gains treatment

Shares held as investment → capital gains (short-term or long-term by holding period)

Deductions are limited to cost, transfer expenses and similar items. Business expenses are not allowed.

Business income treatment

Shares held as stock-in-trade → profits and gains of business or profession

Taxed with other business income. Business expenses related to trading can be claimed.

Tests of investor vs trader

Intention + frequency/volume + holding period + borrowed funds + treatment in books

No single test decides. All facts are weighed together.

Consistency principle (CBDT guidance)

Stand taken for listed shares should be applied consistently in later years

Applies to the taxpayer's choice between investment and stock-in-trade. It does not stop an officer examining a genuine trader.

Who is characterised

Characterisation is done client by client

The portfolio manager does not decide the client's tax head.

Head of income

Dividend and interest (non-business) → Income from Other Sources

Taxed at the investor's slab rate. Not a capital gain.

Deduction against dividend

Allowed = lower of (interest on borrowing for investment, 20% × dividend income)

No other expense is allowed against dividend, including commission and fees.

Net dividend income

Taxable dividend = Gross dividend − allowed interest deduction

Always start from the gross dividend, not the amount received after TDS.

TDS on dividend (resident)

10% of dividend, if PAN is given and the payment crosses the annual threshold

The threshold was raised from ₹5,000 to ₹10,000 from FY 2025-26. Check the latest workbook figure. Once crossed, TDS applies on the whole amount.

TDS on interest other than securities (resident)

10% with PAN; higher rate (20%) without PAN

Thresholds differ for banks, other payers and senior citizens, and they change over time.

Tax credit

Tax payable = Tax on total income − TDS credit

TDS is adjusted against final tax. A refund arises if TDS is higher.

NRI dividend and interest

TDS usually at 20% plus surcharge and cess, subject to treaty benefit

Treated in more detail under the NRI topic.

Who is taxed

PMS investor = taxpayer; portfolio manager = agent/service provider

Gains, dividends and interest are taxed in the client's hands, as the client owns the securities.

Capital gain

Capital gain = Sale value − (Cost of acquisition + Expenses on transfer)

Brokerage on the sale reduces the gain. STT and PMS management fee are not deducted.

Listed equity holding period

Held more than 12 months = long-term; 12 months or less = short-term

Applies to listed equity shares. Check the workbook for other asset classes.

Listed equity tax rates (after 23 July 2024)

STCG = 20%; LTCG = 12.5% on gains above ₹1,25,000 a year (STT paid cases)

Surcharge and cess extra. Always confirm the rates in force in your workbook edition.

Loss set-off

Short-term loss: against STCG or LTCG. Long-term loss: against LTCG only. Carry forward: 8 years

A loss can be carried forward only if the return is filed on time.

Fee and expense treatment

Transfer costs: reduce capital gain. Management fee: generally not deductible against capital gains; deductible against business income

GST is charged on the fees by the portfolio manager.

PMS vs mutual fund

PMS: tax on each trade, in investor's hands. Mutual fund: tax on redemption/dividend, not on trades inside the scheme

This is a favourite comparison for MCQs.

Taxable base for non-residents

Taxable in India = income received in India + income arising in India

Foreign income of an NRI is not taxed in India. Indian PMS gains and dividends are.

Basic residency test

Resident if stay in India ≥ 182 days in the year (other conditions also exist)

There are additional tests based on 60 days plus 365 days in the preceding four years, with relaxations for some citizens. Know that residence decides global or Indian-only taxation.

Capital gains rates on listed equity (STT paid)

STCG = 20% | LTCG = 12.5% on gains above ₹1,25,000 in a year

Holding period for listed shares: up to 12 months is short term, more than 12 months is long term. Cess of 4% is added. The ₹1,25,000 exemption applies to the year's LTCG under this provision.

TDS on payments to non-residents

TDS = rate in force × amount + surcharge (if any) + 4% cess

Section 195 applies to capital gains and other sums chargeable in India. A lower deduction certificate under Section 197 can reduce it.

DTAA relief rule

Tax payable = lower of Act rate or treaty rate (needs TRC and Form 10F)

Treaty applies only if it is more beneficial. Without the TRC, the treaty benefit is not available at source.

Category quick map

Resident individual/HUF → slab rates | Company → corporate rate | NRI → Indian income only, TDS | FPI → special regime

Trusts depend on type: charitable (exempt if conditions met) or discretionary (maximum marginal rate).

Quick revision

• Tax on PMS gains is the investor's liability, because the securities are held in the investor's name.
• Residential status decides which income India taxes: residents are taxed on global income, non-residents on income accruing or received in India.
• Resident status broadly turns on days stayed in India in the year, with a separate test using the preceding years.
• Capital gain is the sale price minus cost of acquisition and transfer expenses.
• A listed equity share held for more than 12 months gives a long-term capital gain.
• Short-term gains on listed equity sold through a recognised exchange with STT are taxed under section 111A.
• Long-term gains on listed equity with STT are taxed under section 112A, with an annual exemption limit before the rate applies.
• Check the rates and exemption limit in your workbook, as they change with the Finance Act.
• Business income versus capital gains depends on facts such as frequency, volume, intention and holding period.
• Dividend is taxed in the shareholder's hands, and interest is generally taxed as income from other sources unless it is business income.
• The portfolio manager reports transactions and information, but does not pay the investor's tax.
• NRIs and other categories can have different rates and compliance, so always identify the investor's status first.

Common mistakes

• Using 36 months or indexation for listed securities. Fix: For securities transferred on or after 23 July 2024, use 12 months for listed ones and no indexation.
• Applying the ₹1,25,000 exemption to each share or each trade. Fix: It is one limit for total equity LTCG in the financial year.
• Thinking one test, such as holding period alone, decides the head of income. Fix: Remember that the courts and CBDT weigh intention, frequency, volume, holding period and books together.
• Believing the portfolio manager decides how the client is taxed. Fix: The taxpayer is the client. Characterisation is done client by client based on that client's facts.
• Treating dividend as exempt in the investor's hands. Fix: Remember that dividend is taxable at slab rate for the recipient. The old dividend distribution tax is gone.
• Deducting brokerage, PMS fee or demat charges from dividend income. Fix: Only interest on borrowed money, capped at 20% of the dividend, is allowed against dividend.
• Thinking the portfolio manager pays the tax on client gains. Fix: Remember ownership. The securities are the client's, so the client is taxed. The manager acts as agent.
• Treating PMS like a mutual fund, with no tax until redemption. Fix: A mutual fund scheme is pooled. In PMS, each sale by the manager is a taxable transfer for you.
• Taxing an NRI's foreign income in India. Fix: For a non-resident, only income received in India or arising in India is taxable.
• Forgetting that the portfolio manager deducts TDS for NRI clients. Fix: Link non-resident payments with Section 195. The payer deducts the tax at the rate in force.

Exam tips

• Memorise the 12-month and 24-month holding periods and the 20% and 12.5% rates. Many questions test only these.
• Read the date of transfer. Rates changed for transfers on or after 23 July 2024.
• In loss questions, always set off short-term loss first, and keep long-term loss for long-term gains.
• Watch for words such as listed, unlisted, equity-oriented and debt-oriented. They change the rule.
• With negative marking of 10%, answer only when you can place the security and rule clearly.
• Expect scenario questions that give holding period, frequency and books, and ask you to pick the head of income.
• Be wary of absolute words such as always, only and never. This topic is about facts and judgment.
• Remember the taxpayer is the client, not the portfolio manager.