1.8 Taxes on trading and investing income

The rules live in M00 · 0.7 The canonical statement of the tax rules for a resident individual (the Income-tax Act, 2025 in force from 1 Apr 2026, its section numbers, the slab table, set-off and carry-forward, turnover and audit, forms and advance tax) is M00 · 0.7, as of 6 Nov 2026. This section keeps only what the cost algebra of 1.7 needs: the three tax buckets, and what they do to a strategy's after-tax expectancy. For section references use M00 · 0.7.1; the mapping there is taken from comparison tables of the two Acts and should be checked against the Act's text on incometaxindia.gov.in before citing. Rates below ignore surcharge and the 4% health-and-education cess.

1.8.1Tax buckets by activity#

The three buckets (summary of M00 · 0.7.2–0.7.3)

Activity	Head	Rate	Losses
Listed equity, delivery, STT paid, held ≤ 12 months	STCG	20%	against STCG or LTCG; carry forward 8 years
The same, held > 12 months	LTCG	12.5% above ₹1.25 lakh a year	against LTCG only; carry forward 8 years
Intraday equity	Speculative business income	slab	against speculative income only; carry forward 4 years
F&O (equity, commodity, currency)	Non-speculative business income	slab	against any income except salary; carry forward 8 years

1.8.2Tax and the edge#

After-tax expectancy Let a strategy's per-trade gain after deductible costs be the random variable $G$, and let $\tau$ be the marginal rate of its bucket.

1. Business income with full set-off (F&O, or intraday when other speculative profits absorb the losses). Costs, including STT, are deductible, and a loss reduces tax at the same rate, so the after-tax gain is $(1-\tau)G$ and
   $$\mathbb E[\text{after tax}] = (1-\tau)\,\mathbb E[G]. \tag{1.4a}$$
   Tax scales expectancy and volatility by the same factor, so it does not change the sign of the edge or the Sharpe ratio; it shrinks the growth rate of M03 · 3.4 by $(1-\tau)$ in the drift and $(1-\tau)^2$ in the variance.
2. No set-off in the year (a speculative loss with no speculative income to absorb it, ignoring the value of carrying it forward). Tax is paid on gains and losses earn nothing, so the after-tax gain is $G - \tau G^+$ and
   $$\mathbb E[\text{after tax}] = \mathbb E[G] - \tau\,\mathbb E[G^+] = (1-\tau)\,\mathbb E[G] - \tau\,\mathbb E[G^-], \tag{1.4b}$$
   with $G^- = \max(-G,0)$. The extra term $-\tau\mathbb E[G^-]$ is a penalty on variance: a zero-expectancy strategy has negative after-tax expectancy, and a positive one can turn negative. This is the precise sense in which the speculative/non-speculative asymmetry of M00 · 0.7.3 hurts a trader who loses intraday and wins in F&O.
3. Delivery equity (capital gains). STT is not deductible, so for a trade with pre-STT gain $G_0$ and STT paid $T_s$, the realised gain is $G = G_0 - T_s$ but the tax base is $G_0$: with set-off, the after-tax gain is $(1-\tau)G - \tau T_s$. STT is taxed as if it were profit: it costs its full face value after tax, which is $1/(1-\tau)$ times the after-tax cost $(1-\tau)T_s$ of a deductible charge of the same size.

1.8.3Worked example: one tax year#