Explainer: How is income tax on stock market gains calculated? Rules for short, long-term capital gains

If you've made money in the recent stock market rally, understanding how your stock market income is taxed is crucial. Here's an explainer on the income tax rules for stock market investors:

1. Types of income: Income from the sale and purchase of shares falls under either business income or capital gain.

2. Holding period matters: Tax and investment experts highlight that the holding period determines the nature of income. If stocks are held for more than 12 months, it falls under long-term capital gain; if the holding period is less than or equal to 12 months, it is considered short-term capital gain.

3. Business income or capital gain: Sujit Bangar from Taxbuddy.com emphasizes that if stocks are sold under line delivery, it's non-speculative and can be taxed as normal business income or capital gain. Trading in futures and options is also considered non-speculative business income.

4. Taxation rates: Business income is taxed at regular slab rates, allowing the reduction of incidental expenses from the business profit to calculate taxable profit. Short-term capital gains are typically taxed at 15%, while long-term capital gains on listed securities have a flat rate of 10% without indexation benefits.

5. Income from IPOs: For income from an Initial Public Offering (IPO), the same tax rules apply. However, the holding period is considered from the date of credit of shares into the demat account after the finalization of share allocation, not from the date of application or allotment.

Note: Remember to consult with certified experts before making any investment decisions.