Introduction
Trading in the Indian stock market is completely legal, but it comes with a compliance framework every investor must understand — from regulatory bodies to tax obligations. Here's what to know before you start.
Regulatory Framework
All trading in India falls under SEBI (Securities and Exchange Board of India), which regulates exchanges, brokers, and market conduct. You'll need a demat and trading account with a SEBI-registered broker, plus a PAN card linked to your bank account, to trade legally.
Capital Gains Tax on Equity (FY 2025–26 / AY 2026–27)
- STCG (Short-Term Capital Gains): Applies when listed shares are sold within 12 months. Taxed at a flat 20% where Securities Transaction Tax (STT) rules are satisfied.
- LTCG (Long-Term Capital Gains): Applies when shares are held beyond 12 months. Taxed at 12.5%, with the first ₹1.25 lakh of such gains in a year often exempt when listed-equity conditions are met.
- Budget 2026 has retained the 12.5% LTCG rate and the ₹1.25 lakh annual exemption limit for listed equity gains.
Loss Set-Off Rules
Short-term capital losses can be set off against both short-term and long-term gains, while long-term capital losses can only be set off against long-term gains. Additionally, from FY 2025–26, a long-term capital loss can only be adjusted once against gains — it can no longer be carried forward and repeatedly set off across multiple years.
F&O and Other Segments
The Union Budget 2026–27 also increased Securities Transaction Tax (STT) on futures to 0.05% and on options to 0.15%, effective from FY 2026–27 — relevant if you trade derivatives.
Filing Requirements
Any short-term capital gains, regardless of amount, require filing via ITR-2 rather than the simpler ITR-1. However, taxpayers with LTCG up to ₹1.25 lakh from listed equity or equity mutual funds can now use the simpler ITR-1 or ITR-4 forms, provided there are no carried-forward losses.
Practical Takeaways for Beginners
- Track every trade's holding period — it directly determines your tax rate.
- Maintain records of buy/sell dates, brokerage, and STT paid.
- Use loss harvesting strategically, but be aware India has no formal wash-sale rule (frequent churning may still get flagged as business income by assessing officers).
- Consult a qualified tax professional or CA for your specific situation — rules around F&O income classification (business income vs. capital gains) can get complex.
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