Investor Earns ₹7 Lakh but Pays ₹74,000 Tax Despite ₹12 Lakh Limit — Here's Why

A tax expert has shed light on how a retail investor who earned ₹7 lakh in stock market profits ended up with a tax liability of ₹74,375, despite believing he fell within a ₹12 lakh exemption limit. The case emphasizes the importance of understanding how different types of income are taxed individually under Indian tax laws, rather than assuming all earnings are taxed as one.

The example, shared by Sujit Bangar, founder of TaxBuddy.com and former IRS officer, on LinkedIn, involved an investor named Rahul. Rahul assumed that since his total net income was below ₹12 lakh after subtracting his losses, he wouldn’t have to pay any tax. However, he failed to account for the fact that income from various stock market activities—such as intraday trading, futures and options (F&O), and capital gains—are each taxed under different sections of the Income Tax Act, with their own rules and limitations on exemptions and loss adjustments.

Rahul’s earnings consisted of:

• A ₹3 lakh loss from intraday trading,

• ₹2.5 lakh profit from F&O trading,

• ₹3.5 lakh short-term capital gains (STCG) from equities, and

• ₹4 lakh long-term capital gains (LTCG).

Rahul deducted the loss from intraday trading from his total income, thinking he had a net income of ₹7 lakh and therefore wouldn’t need to pay taxes. However, Bangar explained that tax rules require each category of income to be considered separately for taxation purposes.

Intraday trading is treated as speculative business income. It is taxed at the individual’s applicable income slab rate. Losses from speculative income can only be offset against other speculative gains and, if unused, can be carried forward for four years.

Futures and options (F&O) are treated as non-speculative business income under Section 43(5). While also taxed at slab rates, F&O losses have broader scope for set-off (excluding salary income) and can be carried forward for up to eight years.

Short-term capital gains (STCG), especially from selling equities within a year, fall under Section 111A. These are taxed at a flat rate of 20%. Losses under this head can be set off against both STCG and LTCG, but they don’t qualify for any basic tax exemption limit like ₹2.5 lakh.

Long-term capital gains (LTCG) from listed stocks are governed by Section 112A. The first ₹1.25 lakh of such gains is exempt, but the remaining is taxed at 12.5%. No indexation benefit is allowed. Importantly, losses here can only be set off against LTCG, and not other categories of income.

Bangar further clarified that the Section 87A rebate—which offers up to ₹12,500 tax relief for individuals with total taxable income under ₹5 lakh—does not apply to LTCG under Section 112A.

He stressed that Rahul’s tax bill arose not from how much he earned, but from how the income was structured. Many retail investors, especially those using app-based trading platforms, fail to realize this and treat their earnings as a single income pool. Such a miscalculation can lead to unexpected tax burdens.

Bangar’s key message was simple yet crucial: “Don’t confuse low income with low tax.” Understanding how each form of income is categorized and taxed is essential to avoid surprises during tax filing season. Market profits, he warns, are not automatically tax-free unless investors understand the fine print of the Income Tax Act.