Think market income below Rs 12 lakh is tax free? TaxBuddy founder warns how this common mistake could attract big tax notice

Economic Times

02-07-2025

Many Indian retail investors are surprised to learn that earning under ₹12 lakh in the stock market doesn't guarantee tax exemption. Confusions arise from overlooking how different income types are taxed, such as intraday trading, F&O, STCG, and LTCG. Understanding income classification is crucial for accurate tax calculation and avoiding unexpected notices.
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Breakdown of the investor's income
₹3 lakh in intraday losses
₹2.5 lakh from futures and options (F&O) gains
₹3.5 lakh in short-term capital gains (STCG)
₹4 lakh in long-term capital gains (LTCG)
The total profit was under ₹12 lakh. However, that did not make it exempt from tax.
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Tax confusion is common
Retail investing surge meets tax surprises
A growing number of retail investors in India are discovering that earning less than ₹12 lakh from stock markets does not automatically mean a tax exemption. According to Sujit Bangar, founder of TaxBuddy.com, investors often get caught off guard because they overlook how each type of income is taxed under different rules.In a recent example, Bangar highlighted the case of a full-time investor who earned ₹7 lakh from the market. Expecting zero tax, the investor instead received a tax notice demanding ₹74,375.The investor's earnings included:How tax rules treat different incomesTax laws treat each income type separately:Intraday trading: Treated as speculative business income, taxed at slab rates, and losses can only be adjusted against speculative profits. Losses can be carried forward for four years.Futures and Options (F&O): Classified as non-speculative business income, taxed at slab rates. Losses have broader set-off options and an eight-year carry-forward period.Short-term capital gains (STCG): Taxed at a flat rate of 20% under Section 111A. STCG losses can offset both STCG and LTCG.Long-term capital gains (LTCG): Only ₹1.25 lakh is exempt under Section 112A. Any amount above that is taxed at 12.5%. No indexation benefits or Section 87A rebate apply.Don't confuse low income with low tax,' Bangar said in a detailed LinkedIn post. 'Understand how each income is classified—and taxed.'He pointed out that the investor's mistake was not the profit amount but how the gains were treated under tax law. 'What got him in trouble wasn't profit—it was classification.'Bangar's post comes at a time when millions of Indians are entering the stock market through trading apps, often without full knowledge of tax laws.'Tag someone who trades but thinks ₹12L = 'tax-free zone,'' Bangar wrote. His message underlines the importance of understanding tax rules before investing.For new and existing investors, the key takeaway is this: knowing how your income is classified matters more than how much you earn.