Investor earns Rs 7 lakh, faces Rs 74,000 tax despite Rs 12 lakh limit. Know why

India Today

02-07-2025

A tax expert has explained how a retail investor who earned Rs 7 lakh in stock market profits ended up with a tax demand of Rs 74,375. The case highlights how misreading the nature of income can lead to unexpected tax liabilities, even when total earnings seem modest.Sujit Bangar, founder of TaxBuddy.com and a former IRS officer, shared the example on LinkedIn to warn investors against a common misconception. The investor, Rahul, believed that since his total income was below Rs 12 lakh, he would not be liable to pay tax. What he overlooked was how different types of market income are treated under the tax code.advertisementRahul's earnings included a Rs 3 lakh loss from intraday trading, a Rs 2.5 lakh gain from futures and options, Rs 3.5 lakh in short-term capital gains from equities, and Rs 4 lakh in long-term capital gains. After subtracting the losses, he assumed that his Rs 7 lakh net income was tax-free.
However, Bangar pointed out that the tax system does not allow such aggregation. Each category of income is assessed and taxed separately, with its own rules, exemptions, and set-off provisions.Intraday trading is treated as speculative business income. It is taxed at the individual's slab rate, and any losses can be adjusted only against speculative gains. If not utilised, such losses can be carried forward for four years.advertisementFutures and options are considered non-speculative business income under Section 43(5). These are also taxed at slab rates, but the losses can be set off against a wider range of incomes except salary, and carried forward for up to eight years.Short-term capital gains, such as those from selling equities within a year, fall under Section 111A. These gains are taxed at a flat rate of 20 percent. While losses in this category can be adjusted against both short- and long-term capital gains, they do not qualify for basic income exemptions.Long-term capital gains from listed equities are covered under Section 112A. The first Rs 1.25 lakh in gains is exempt, but any amount above that is taxed at 12.5 percent. There is no indexation benefit, and losses here can only be set off against other long-term capital gains.Bangar also clarified that the Section 87A rebate of up to Rs 12,500, available to individuals with taxable income under Rs 5 lakh, does not apply to long-term capital gains under Section 112A.The real issue, according to him, was not how much Rahul earned but how that income was classified. Many investors make the mistake of treating their total earnings as one pool, ignoring the rules specific to each category.advertisementHis warning comes at a time when market participation by retail investors is surging, driven by app-based trading platforms. For many, the complexity of tax treatment remains an afterthought until the tax bill arrives.'Don't confuse low income with low tax,' Bangar wrote. 'Understand how each income is classified and taxed.'His message is clear: market profits are no guarantee of tax freedom unless investors understand the fine print.- Ends