NISM-Series-X-A: Investment Adviser (Level 1) · Investing in Stocks

Taxation of Equity Investments: Capital Gains, Dividends and STT

Updated 11 October 2026 · Fact-checked

On listed shares with STT paid, gains from sales within 12 months are short-term and taxed at 20%. Gains after 12 months are long-term and taxed at 12.5% above ₹1,25,000 a year. Dividends are taxed at your slab rate. STT is a transaction tax and is not deductible. Check the rate version in your workbook.

Understand Taxation of Equity Investments

Tax on shares has three parts: tax on the dividend you receive, tax on the capital gain when you sell, and Securities Transaction Tax (STT) that you pay when you trade on an exchange.

A capital gain is sale price minus purchase cost. The tax rate depends on how long you held the shares. For listed equity shares, holding 12 months or less gives a short-term capital gain (STCG). Holding more than 12 months gives a long-term capital gain (LTCG). The holding period runs from the date of purchase to the date of sale.

The special rates apply only when STT has been paid on the sale (and, for LTCG, generally on the purchase too, with exceptions). For transfers on or after 23 July 2024, STCG is taxed at 20% and LTCG at 12.5%. LTCG is taxed only on the part of the total gain in a financial year that exceeds ₹1,25,000. There is no indexation benefit.

For shares bought on or before 31 January 2018, grandfathering applies. The cost of acquisition is taken as the higher of the actual cost and the lower of (fair market value on 31 January 2018, sale price). This protects gains made up to that date from tax.

Dividends are added to the shareholder's income and taxed at the slab rate under 'income from other sources'. A company deducts TDS at 10% on dividends paid to resident individuals above a yearly threshold (₹10,000 from FY 2025-26; ₹5,000 earlier). Health and education cess and surcharge are extra. STT is a small tax charged on each trade. It is not allowed as a deduction when computing the gain. Rates change often, so always follow the version your workbook and question state.

Key formulas to remember

Capital gain: Capital gain = Sale price − Cost of acquisition − Transfer expenses; Brokerage and similar transfer costs are deductible. STT is not deductible.
Short-term holding period (listed equity): Held ≤ 12 months → STCG; held > 12 months → LTCG; Exactly 12 months is still short-term.
STCG rate (Section 111A, STT paid): 20% (transfers on or after 23 July 2024); Earlier rate was 15%. No ₹1,25,000 exemption applies to STCG.
LTCG rate (Section 112A, STT paid): 12.5% on LTCG above ₹1,25,000 in a financial year; Earlier rate was 10% above ₹1,00,000. No indexation.
Taxable LTCG: Taxable LTCG = Total LTCG in the year − ₹1,25,000; If total LTCG is ₹1,25,000 or less, no LTCG tax is payable.
Grandfathered cost (bought on or before 31 Jan 2018): Cost = Higher of [Actual cost, Lower of (FMV on 31 Jan 2018, Sale price)]; Only protects gains up to 31 January 2018. It cannot create a loss.
Dividend tax: Taxed at the recipient's slab rate; TDS 10% for resident individuals above the threshold; Threshold is ₹10,000 per year from FY 2025-26.
STT on delivery-based equity: 0.1% on buy value and 0.1% on sell value; Intraday equity: 0.025% on the sell side only. STT is not deductible.
Loss set-off and carry forward: STCL set off against STCG or LTCG; LTCL set off only against LTCG; carry forward 8 years; Carry forward needs the return to be filed by the due date.

How to solve Taxation of Equity Investments questions

Use this order for any numerical or rule-based question on taxation of listed shares.

1Check the asset and the trade: listed equity share, sold on a recognised exchange, STT paid. If not, the special rates may not apply.
2Find the holding period from purchase date to sale date. More than 12 months is long-term. Otherwise it is short-term.
3Compute the gain: sale price minus cost, minus brokerage or transfer expenses. Use the grandfathered cost if bought on or before 31 January 2018.
4Apply the loss set-off rules if the question gives losses. Set off short-term losses first against short-term gains, then long-term.
5For LTCG, subtract the ₹1,25,000 exemption from the total LTCG of the year. For STCG, there is no exemption.
6Multiply by the rate: 20% for STCG, 12.5% for LTCG. Add cess or surcharge only if the question asks for it.
7For dividends, apply the slab rate. Check the TDS threshold if the question asks about TDS.
8Ignore STT as a deduction. Scan the options for the trap values.

Quickest way: Three-check shortcut

When to use it: Use it for MCQs with a purchase date, sale date and amounts, when you have about a minute per question.

Check the date gap first. Over 12 months means 12.5% with exemption. Up to 12 months means 20% with no exemption.
Compute the gain in one line. Subtract ₹1,25,000 only for LTCG, using the year's total LTCG.
Multiply by the rate, then eliminate options that use the old rates (15% or 10%) or that deduct STT.

Common mistakes in Taxation of Equity Investments

Applying the ₹1,25,000 exemption to short-term gains.
Students remember 'exemption' and apply it to all equity gains.
Fix: The exemption belongs only to LTCG under Section 112A. STCG is taxed from the first rupee.
Treating exactly 12 months as long-term.
The word 'long-term' feels like it starts at 12 months.
Fix: Long-term needs more than 12 months. Twelve months or less is short-term.
Deducting STT while computing capital gain.
STT feels like a cost of trading.
Fix: STT is not an allowed deduction. Only brokerage and similar transfer costs are deducted.
Using old rates of 15% STCG and 10% LTCG with ₹1,00,000 exemption.
Older study notes still show the earlier rates.
Fix: For transfers on or after 23 July 2024 use 20%, 12.5% and ₹1,25,000. Use old rates only if the question gives an earlier date.
Saying dividends are tax-free for the investor.
Students recall the old dividend distribution tax paid by companies.
Fix: Dividends are now taxed in the shareholder's hands at slab rates, with TDS if above the threshold.
Setting off long-term loss against short-term gain.
Students assume all capital losses are interchangeable.
Fix: A long-term loss can be set off only against long-term gains. A short-term loss can be set off against both.

Worked examples

Example 1

Rahul bought listed shares for ₹4,00,000 in June 2022 and sold them on the exchange in September 2025 for ₹7,00,000. STT was paid on both. He has no other capital gains that year. Ignoring cess, how much LTCG tax does he pay? (A) ₹21,875 (B) ₹37,500 (C) ₹17,500 (D) ₹60,000

Show the solution

Holding period is over 3 years, so the gain is long-term.
Gain = ₹7,00,000 − ₹4,00,000 = ₹3,00,000.
Taxable LTCG = ₹3,00,000 − ₹1,25,000 = ₹1,75,000.
Tax = 12.5% × ₹1,75,000 = ₹21,875.
Option B is 12.5% of the full gain. Option C uses 10% on the taxable amount. Option D is 20% on the full gain.

Answer: (A) ₹21,875

Example 2

Meera bought listed shares for ₹2,00,000 on 1 August 2025 and sold them on the exchange on 1 February 2026 for ₹2,60,000, with STT paid. Ignoring cess, what is her tax on the gain? (A) ₹12,000 (B) ₹7,500 (C) ₹0 (D) ₹6,000

Show the solution

Holding period is 6 months, which is 12 months or less, so the gain is short-term.
Gain = ₹2,60,000 − ₹2,00,000 = ₹60,000.
STCG is taxed at 20% with no exemption.
Tax = 20% × ₹60,000 = ₹12,000.
Option B is 12.5% (LTCG rate). Option C wrongly uses the exemption. Option D is the old 10% LTCG rate.

Answer: (A) ₹12,000

Exam tips

Read the holding period first. Many questions are decided by whether the gap is more than 12 months.
Look at the transaction date. If it is before 23 July 2024, the older rates of 15% and 10% may be intended. Otherwise use the current rates.
Remember what STT is not: it is not deductible, and it is not a capital gains tax.
With negative marking of 25% of the question's marks, avoid guessing between 12.5% and 20% options. Decide using the holding period.
Expect statement-type questions on grandfathering, loss set-off and dividend TDS. Learn the exact conditions.

Practice questions from Investing in Stocks

Taxation of Equity Investments in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

CS ProfessionalEquity Share Capital and Sources of Equity Funding

Taxation of Equity Investments: frequently asked questions

What is the holding period for long-term capital gain on listed shares?

The shares must be held for more than 12 months. If you sell within 12 months, including exactly 12 months, the gain is short-term.

Is dividend income from shares taxable in India?

Yes. Dividends are taxed in the shareholder's hands at the applicable slab rate. Companies deduct 10% TDS from resident individuals when the dividend exceeds the yearly threshold.

Can I deduct STT from my capital gain?

No. STT is not allowed as a deduction when computing capital gains. Only expenses wholly connected with the transfer, such as brokerage, are deducted.

What is grandfathering for equity shares?

It protects gains made up to 31 January 2018 for shares bought on or before that date. The cost is taken as the higher of actual cost and the lower of the 31 January 2018 market value and the sale price.