Taxation of Securities in India (FY 2025–26): A Complete & Practical Guide

Investing in securities such as shares, mutual funds, bonds, and derivatives has become common for Indian taxpayers. However, taxation of securities is one of the most misunderstood areas of income tax, and a small classification error can lead to tax demand, interest, penalty, or scrutiny.

This guide explains the taxation of securities in India for FY 2025–26, strictly as per the Income-tax Act, 1961, including amendments up to the Finance Act, 2025.

1. What Are “Securities” Under Income Tax Law?

For income-tax purposes, securities broadly include:

• Equity and preference shares

• Units of mutual funds

• Bonds and debentures (listed or unlisted)

• Exchange Traded Funds (ETFs)

• Derivatives such as Futures & Options (F&O)

Each category is taxed differently depending on:

• Nature of security

• Holding period

• Date of acquisition

• Applicable section of the Act

2. Taxation of Equity Shares & Equity-Oriented Mutual Funds

Holding Period

• Short Term: Up to 12 months

• Long Term: More than 12 months

Tax Rates (STT Paid Transactions)

• Short-Term Capital Gain (STCG):Taxable at 20% under Section 111A

• Long-Term Capital Gain (LTCG):Taxable at 12.5% under Section 112A(only on gains exceeding ₹1,25,000 in a financial year)

Important Points

• Securities Transaction Tax (STT) must be paid

• Indexation benefit is not available

• Exemption limit of ₹1.25 lakh is per assessee per year, not per transaction

3. Debt Mutual Funds – The Most Critical Change (Section 50AA)

One of the most important changes in recent years relates to debt mutual funds.

Units Acquired on or After 01-04-2023

As per Section 50AA (inserted by Finance Act, 2023 and unchanged by Finance Act, 2025):

• Always treated as Short-Term Capital Asset

• Taxable at normal slab rates

• No indexation

• No LTCG benefit, irrespective of holding period

• Many investors still assume debt funds get LTCG after 3 years.This assumption is now incorrect and risky.

  
  

Units Acquired Before 01-04-2023 (Grandfathered)

• Long-term if held for more than 36 months

• Indexation benefit available

• Old provisions continue to apply

4. Taxation of Unlisted Shares (Startups & Private Companies)

Unlisted shares are common in:

• Startups

• Private limited companies

• ESOP transactions

Holding Period

• Short Term: Up to 24 months

• Long Term: More than 24 months

Tax Rates

• STCG: Taxable at slab rates

• LTCG: Taxable at 12.5%

Important Note

• Indexation benefit is not available

• Valuation and documentation play a crucial role during scrutiny

5. Taxation of Bonds & Debentures (Listed or Unlisted)

Holding Period

• Short Term: Up to 12 months

• Long Term: More than 12 months

Tax Rates

• STCG: Taxable at slab rates

• LTCG: Taxable at 12.5%

Key Point

• Indexation benefit is not available, even for long-term holdings

6. Derivatives (F&O / Commodity Trading)

Unlike shares and mutual funds, derivatives are not treated as capital assets.

Tax Treatment

• Income from F&O is treated as Business Income

• Taxable at applicable slab rates

• Losses can be set off as per business income rules

Audit Applicability

• Tax audit under Section 44AB may apply if turnover exceeds prescribed limits

• Proper computation of turnover is critical

7. Set-Off and Carry Forward of Capital Losses

• Short-Term Capital Loss (STCL):Can be set off against STCG and LTCG

• Long-Term Capital Loss (LTCL):Can be set off only against LTCG

• Losses can be carried forward for 8 assessment years

• Return must be filed within due date to claim carry forward

8. Reporting, AIS & Scrutiny Risk

Today, most securities transactions are reported through:

• Stock exchanges

• Mutual fund houses

• Depositories

These appear in AIS and TIS.Any mismatch between return and AIS can trigger automated notices.

9. Professional Advisory Note

Taxation of securities is product-specific, date-specific, and section-driven.Wrong classification—especially in debt mutual funds and derivatives—can result in tax demand, interest, penalty, or scrutiny.

Before filing returns or executing high-value transactions, professional review is strongly recommended.