You check your portfolio. Some stocks are up, some are down but overall, you’ve made a neat little gain. Maybe a few dividends dropped in too. Feels good, right? But before you celebrate, remember the government is tracking all your stock market activities.
Now capital gains and dividend income are two of the most common ways investors earn, and in the past few union budgets, there have been numerous changes with respect to their taxation. So in this post, I’ll walk you through all the details you must know if you’re investing in stock market.
How are stock market capital gains taxed?
First things first, whenever you sell shares or equity mutual funds for profit, the amount you earn is known as a capital gain.
Now how much tax you need to pay on these gains actually depends on how long you’ve held the asset. Based on the holding period, capital gains are classified into two types.
For listed stocks and equity-oriented mutual funds, it’s short-term if held for 12 months or less, and long-term if held for more than 12 months.
Let’s talk about tax rates now. These were recently updated during Union Budget 2024, and we’ve mentioned both old and revised rates in the table below.
For investors who purchased stocks or equity mutual funds before 31st Jan 2018, grandfathering rule comes into effect. That’s because equity capital gains were completely tax-free earlier. You can read more about grandfathering here.
Tax exemption on long-term capital gains (under Section 112A)
As you’d have noticed, the tax rates for LTCG are lower than those for STCG. That’s because the government wants to promote long-term investment behaviour.
And not only this, if your long term equity gains are below a certain amount, they are completely tax-exempt.
Earlier, this exemption was ₹1 lakh but it got increased to ₹1.25 lakh per year from FY 2024-25 onwards i.e. 1st April 2024 onwards.
Let’s look at an example to understand how it works.
→ If you buy shares for ₹3,00,000
→ Sell after 14 months for ₹5,00,000
→ Your gains = ₹2,00,000 (will be long-term)
→ Exempt gains = ₹1,25,000
→ Net taxable gains = ₹2,00,000 - ₹1,25,000 = ₹75,000
→ Tax @12.5% = ₹75,000 x 12.5% = ₹9,375
That’s all about capital gains, we will move to dividends now.
How is dividend income taxed?
Unlike capital gains, dividend isn’t taxed at special rate but it’s added to your total income and taxed at slab rates — be it 5%, 20%, or 30%. So, if you’re in the highest tax bracket, you might pay up to ₹3,000 in taxes on a dividend income of ₹10,000.
TDS on dividend income under Section 194
The government also requires companies to deduct tax at source (TDS) before paying you the dividend. Here’s how it works:
- If your total dividend from a company exceeds ₹10,000 in a financial year, they will deduct 10% TDS before crediting it to you.
Example:
You receive ₹12,000 in dividends from Company A.
→ TDS @10% = ₹1,200 deducted
→ You receive ₹10,800 in your bank account
→ But you must still report full ₹12,000 as income, and claim the ₹1,200 as TDS in your return.
Reporting dividend income
From reporting point of view, dividend income, whether from shares or mutual funds, must be reported under the head ‘Income from Other Sources’ in your ITR.
Also, cross-check your Form 26AS and Annual Information Statement (AIS) to make sure all dividend payments and TDS are correctly reflected, especially if you’ve holdings across multiple demat accounts.
Advance tax on stock market income
If the capital gain and dividend incomes push your total tax liability above ₹10,000 in a year, you’re required to pay advance tax in instalments. Missing these payments can lead to interest penalties under Sections 234B and 234C.
So even though dividends feel “hands-off,” they may come with active tax compliances.
Understanding capital gains and dividend income taxation is key to calculating your true post-tax returns and making smarter investment decisions because the more clarity you have on taxes, the more control you have over your wealth.