Short Term Capital Gain Tax on Shares
Short term capital gain tax on shares applies whenever an investor sells listed equity shares held for 12 months or less at a profit on a recognized stock exchange. Under Section 196 of the Income-tax Act, 2025 (which corresponds to Section 111A of the repealed Income-tax Act, 1961), qualifying short-term equity gains face a flat tax rate of 20 percent.
A frequent error in tax filings is assuming that any transaction closed within a few days or hours automatically qualifies for this 20 percent capital gains rate. Under Indian direct tax statutes, delivery-based investments, same-day intraday trades, and exchange-traded derivatives operate under fundamentally different tax heads. While taking delivery of shares generates capital gains, intraday trading and derivatives are classified as business income and taxed at your applicable personal slab rates.
Dhanvantri Capital Services Private Limited, known as Dhanvantree, is an AMFI-registered mutual fund and Specialised Investment Fund distributor, ARN-194216, and a distributor of portfolio management services registered with APMI, APRN10201. We are not registered investment advisers. This page explains statutory direct tax rules and calculation mechanics for Tax Year 2026-27 (Financial Year 2026-27). It recommends no security, executes no stock trade, and sets no course of action. The choice is yours.
The core rules at a glance:
Listed equity shares held for 12 months or less generate Short-Term Capital Gains (STCG)
When Securities Transaction Tax (STT) is paid on transfer, net qualifying STCG is taxed at a flat 20% under Section 196 (formerly Section 111A)
Intraday equity trading is generally classified as speculative business income, added to regular income and taxed at your applicable slab rate
Exchange-traded derivative contracts meeting statutory conditions are treated as non-speculative business income and taxed at slab rates
Selling listed shares through a genuine off-market sale without STT eliminates the 20% rate; the profit is taxed at your applicable personal slab rate
Chapter VIII deductions (such as Section 123, formerly Section 80C) cannot be set off against Section 196 equity gains
Resident individuals whose other income is below the basic exemption threshold can adjust the shortfall against their STCG
How short-term capital gains on shares are calculated
Calculating short-term capital gains involves deducting your allowable acquisition and transfer costs from the total sale consideration. Under Section 72 of the Income-tax Act, 2025, capital gains computation follows a structured statutory formula:
Net Short-Term Capital Gain Formula
Direct tax legislation distinguishes between expenses that form part of the acquisition cost and expenses incurred in connection with the transfer:
Cost of Acquisition: The actual purchase price paid for the shares, plus eligible direct expenses such as purchase-side brokerage, exchange turnover charges, and stamp duty incurred to acquire the asset.
Expenditure Incurred Wholly and Exclusively on Transfer: Direct costs incurred at the time of sale, such as sale-side brokerage and transaction charges.
Non-Deductible Charges: Securities Transaction Tax (STT) cannot be deducted as an expense when computing capital gains. Direct tax law explicitly prohibits adding STT to your purchase cost or deducting it from your sale consideration.
A Worked Calculation Example
Example: Calculating Short-Term Capital Gains on Listed Shares
Suppose an investor purchases 500 shares of a listed company on the National Stock Exchange (NSE) on 10 May 2026 at ₹400 per share. On 15 November 2026, after holding the shares for roughly six months, the investor sells all 500 shares at ₹550 per share.
Capital Gain Calculation
Because STT was paid on transfer and the shares were held for 12 months or less, this ₹74,000 gain is taxed under Section 196 at a flat rate of 20 percent. The base tax is ₹14,800. Adding the mandatory 4 percent Health and Education Cess (₹592) brings the total tax liability to ₹15,392 (before any applicable surcharge).
The 20% flat tax rate under Section 196
The statutory tax rate on short-term capital gains from listed equities is a flat 20 percent. This rate is codified in Section 196 of the Income-tax Act, 2025, which corresponds to Section 111A of the repealed 1961 Act.
To qualify for this 20 percent rate, three statutory conditions must be satisfied:
Eligible Capital Asset: The security transferred must be an equity share in a company, a unit of an equity-oriented mutual fund, or a unit of a business trust.
Holding Duration: The asset must have been held for 12 months or less prior to the date of transfer.
STT Paid on Transfer: The transaction of sale must take place on a recognized stock exchange in India, and Securities Transaction Tax must have been charged on the transfer.
Unlike long-term equity gains under Section 198 (which receive an aggregate annual tax-free threshold of ₹1,25,000), short-term equity gains carry no dedicated annual tax-free allowance. Every rupee of net short-term gain is taxable, subject only to basic exemption shortfall adjustments for eligible resident taxpayers.
Furthermore, direct tax statutes explicitly prohibit claiming Chapter VIII deductions against Section 196 gains. If you have ₹2,00,000 of short-term capital gains under Section 196, you cannot reduce that taxable amount by investing in tax-saving instruments under Section 123 (formerly Section 80C) or mediclaim policies under Section 80D.
For broader capital gains provisions across other asset categories, consult our blog on short-term capital gains tax.
Delivery STCG vs intraday vs F&O trading
The most frequent confusion in stock market tax reporting occurs when market participants treat intraday trading or derivatives as capital gains. In Indian direct tax law, the operational structure of the trade determines its legal classification.
The table below outlines the statutory distinctions among delivery share investments, intraday equity trading, and derivative contracts:
| Parameter | Delivery Equity Shares (STCG) | Intraday Equity Trading | Exchange-Traded Derivatives (F&O) |
|---|---|---|---|
| Transaction Structure | Shares are credited to your Demat account (delivery taken). | Bought and sold within the same trading session (no delivery). | Derivative contracts settled without physical delivery of underlying equity. |
| Tax Classification | Capital Gains (Short-Term Capital Asset). | Profits and Gains of Business (Speculative Business). | Profits and Gains of Business (Non-Speculative Business). |
| Statutory Provision | Section 196 (formerly Section 111A) | Section 43(5) of the Income-tax Act. | Proviso to Section 43(5) (formerly 43(5)(d)) |
| Tax Rate | Flat 20% (plus 4% cess). | Taxed at your applicable personal slab rate. | Taxed at your applicable personal slab rate. |
| Expense Deductions | Direct acquisition and transfer costs (brokerage, turnover charges). | Business expenditure (trading software, internet, advisory fees, office costs). | Business expenditure (trading setup, platform fees, interest, advisory costs). |
| Current-Year Loss Set-Off | Can offset STCG and LTCG; cannot offset business or salary income. | Can only offset speculative business profits; cannot offset STCG, LTCG, or salary. | Can offset any business income, STCG, or LTCG; cannot offset salary. |
| Loss Carry-Forward Period | Up to 8 tax years under Section 111. | Up to 4 tax years under Section 113. | Up to 8 tax years under Section 112. |
Older taxpayers get a higher exemption under the old regime only: ₹3 lakh from age 60, ₹5 lakh from age 80. The new regime applies ₹4 lakh at every age, which makes it the stronger structure for most people between 60 and 80 who have no large deductions to claim.
Why the Distinction Matters
Under Section 43(5), contracts for the purchase or sale of stocks that are settled otherwise than by actual delivery are defined as speculative transactions. Intraday equity trading falls squarely into this category. The net profit is speculative business income, added to your regular earnings and taxed at your applicable income tax slab rate.
In contrast, qualifying exchange-traded derivatives (Futures and Options) are explicitly excluded from the definition of speculative transactions when traded on a recognized stock exchange through a registered broker. They are classified as non-speculative business income.
An investor in the 30 percent tax bracket who earns ₹2,00,000 from delivery shares held for 4 months pays a flat 20 percent base tax under Section 196. If that same individual earns ₹2,00,000 from intraday equity trades, that amount is taxed at their applicable 30 percent marginal slab rate (plus cess).
Moreover, an investor who incurs losses in intraday trading cannot set off those speculative losses against delivery share capital gains. Under direct tax statutes, speculative business losses can only offset speculative business profits.
Off-market share transfers, private sales, and gifts
The concessional 20 percent tax rate under Section 196 is a conditional statutory benefit tied to the payment of Securities Transaction Tax. When shares are transferred outside a recognized stock exchange where no STT is levied, the transaction falls outside Section 196.
It is vital to distinguish among different types of non-exchange transactions:
1. Genuine Off-Market Sales of Listed Shares
If you sell listed shares directly to another person in a private sale without routing the trade through an exchange, no STT is collected.
If the shares were held for 12 months or less, the resulting gain is treated as general short-term capital gains. It is taxed at the seller’s applicable personal slab rate, rather than the concessional 20 percent rate. For a taxpayer whose marginal rate is 30 percent, the gain is taxed at 30 percent (plus 4 percent cess).
2. Gifts and Involuntary Transfers
A genuine gift of shares made without monetary consideration to an individual is not treated as a taxable transfer under Section 47 for the person giving the shares.
The donor does not realize capital gains on the gift. However, the recipient must evaluate whether the receipt is taxable under Income from Other Sources (depending on whether the donor is an eligible relative or whether the fair market value exceeds statutory exemption thresholds).
Lumping private sales and gifts together under a generic off-market label is incorrect; their legal character and tax consequences are distinct.
3. Unlisted Equity Shares
For unlisted shares of private companies, the statutory short-term holding line is 24 months (not 12 months). Any profit realized on unlisted shares held for 24 months or less is short-term capital gain and is taxed at the investor’s applicable personal income tax slab rate.
To see how personal tax brackets are structured across income tiers, read our overview of income tax rules.
Basic exemption limit adjustment for resident individuals
Although Section 196 does not provide a standalone annual tax-free threshold, direct tax legislation provides a relief mechanism for resident individuals and Hindu Undivided Families (HUFs) whose regular income falls below the basic exemption threshold.
Under the proviso to Section 196 (which mirrors the historical proviso to Section 111A), if a resident individual’s regular taxable income from other heads (such as bank interest or salary) is less than the basic exemption limit, the unexhausted shortfall can be adjusted against short-term capital gains on shares.
A Worked Example Across Both Tax Regimes
Consider an illustrative calculation for a resident individual aged 35 in Tax Year 2026-27 with the following profile:
Income from Other Sources (Bank Interest): ₹1,00,000
Qualifying STCG under Section 196: ₹4,00,000
Assumption: No other income, deductions, or special credits apply.
The applicable basic exemption threshold depends on the tax regime chosen by the taxpayer. Under official direct tax provisions for Tax Year 2026-27, the basic exemption threshold is ₹4,00,000 under the default new tax regime, and ₹2,50,000 under the optional old tax regime (for an individual under 60 years of age):
| Calculation Step | New Tax Regime (Default) | Old Tax Regime (Optional) |
|---|---|---|
| Basic Exemption Threshold | ₹4,00,000 | ₹2,50,000 |
| Regular Income (Bank Interest) | ₹1,00,000 | ₹1,00,000 |
| Unexhausted Basic Exemption | ₹3,00,000 | ₹1,50,000 |
| STCG Before Adjustment | ₹4,00,000 | ₹4,00,000 |
| Taxable STCG After Adjustment | ₹1,00,000 | ₹2,50,000 |
| Tax at 20% on Remaining STCG | ₹20,000 | ₹50,000 |
| Health and Education Cess (4%) | ₹800 | ₹2,000 |
| Illustrative Tax Liability on STCG | ₹20,800 | ₹52,000 |
Important Limitation for Non-Residents: Under the statutory terms of Section 196, this basic exemption shortfall adjustment is strictly available to resident individuals and resident HUFs. Non-residents cannot adjust their basic exemption shortfall against Section 196 capital gains, though an NRI’s ultimate tax liability depends on total income, withholding provisions, and applicable Double Taxation Avoidance Agreements.
Loss adjustment and the Section 121 filing condition
When delivery share transactions result in a loss, direct tax statutes allow you to utilize that short-term capital loss (STCL) to offset other taxable capital gains.
Under direct tax rules, loss adjustments operate through defined statutory stages:
1. Current-Year Set-Off Rules
Offsetting Capital Gains: A short-term capital loss from shares can be set off against both short-term capital gains and long-term capital gains realized within the same financial year. For example, a ₹60,000 short-term loss on stocks can offset a ₹60,000 long-term capital gain from property or equity funds.
No Inter-Head Set-Off: Capital losses cannot be set off against income under any other head. You cannot deduct share trading losses from salaries, house property rent, or business income.
2. Eight-Year Carry-Forward under Section 111
If allowable capital losses exceed your taxable capital gains in a financial year, the unabsorbed loss can be carried forward:
Under Section 111 of the Income-tax Act, 2025, unabsorbed short-term capital losses can be carried forward for up to 8 tax years immediately following the year the loss was first computed.
In future tax years, carried-forward short-term losses can only be set off against future capital gains (STCG or LTCG).
3. The Mandatory Filing Condition under Section 121
Under direct tax legislation, there is a strict separation between filing obligations and carry-forward entitlements:
Section 263(1) of the Income-tax Act, 2025 (formerly Section 139(1)) specifies the legal obligation to file an income tax return on or before the statutory due date.
Section 121 of the Income-tax Act, 2025 establishes the operative condition: unabsorbed losses under Section 111 cannot be carried forward unless the return of income for the year in which the loss was incurred is filed on or before the due date prescribed under Section 263(1).
If you file a belated return after the statutory deadline, your right to carry forward the capital losses incurred in that financial year is completely forfeited.
For complete rules on loss matrices across multiple asset categories, visit our central hub on capital gains on shares. To understand holding rules when shares are held for more than 12 months, read our blog on long-term capital gain tax on shares.
If you are redeeming units of mutual funds rather than individual company shares, review our dedicated blog on short-term capital gain tax on mutual funds.
Common Questions
Short-term capital gains on listed equity shares held for 12 months or less where STT is paid on transfer are taxed at a flat rate of 20 percent under Section 196 of the Income-tax Act, 2025. A mandatory 4 percent Health and Education Cess applies on top of this base rate.
No. Intraday trading (buying and selling shares within the same trading session without taking Demat delivery) is classified as speculative business transactions under Section 43(5). The profit is speculative business income, added to your regular taxable income and taxed at your applicable personal slab rate.
No. Direct tax statutes explicitly prohibit claiming Chapter VIII deductions (including Section 123, formerly Section 80C) against special-rate capital gains taxable under Section 196.
If listed equity shares are sold in an off-market transfer without paying STT, the transaction does not qualify for the 20 percent rate under Section 196. The profit is classified as general short-term capital gains and taxed at the seller’s applicable personal income tax slab rate.
No. Under Section 121 of the Income-tax Act, 2025, unabsorbed capital losses cannot be carried forward to subsequent years unless the return of income is filed on or before the statutory due date prescribed under Section 263(1).
Disclaimer: The views expressed here are of the author and do not reflect those of Dhanvantree. Mutual funds are subject to market risks, please read the scheme documents carefully before investing.