Funds & Tax: Tax reporting

Why this page is structured this way: A broker is not a tax adviser, yet it holds the trade-level data a client’s return depends on and is not the party that reports that data to the tax administration. The page separates three routinely confused things: how the income is classified and taxed, what the broker produces for the client, and who files what with the Income-tax Department. Sections are cited under both the Income-tax Act, 1961 and the Income-tax Act, 2025, because the 2025 Act took effect on 1 April 2026 and both numberings are in live use.

TL;DR

• Two regimes of section numbers are current. The Income-tax Act, 2025 came into force on 1 April 2026. Rates carried over largely unchanged; the numbering did not, and 2026 statements and software routinely mix the two. [AI inference — verify before acting]
• Listed-equity rates have been stable since 23 July 2024. Short-term capital gains on STT-paid listed equity and equity-oriented units: 20%. Long-term: 12.5% on gains above Rs.1,25,000 a year, with a 12-month holding-period test. The Finance (No. 2) Act, 2024 set these for transfers on or after 23 July 2024; Budget 2026 left them unchanged.
• Grandfathering still applies. For equity shares and equity-oriented units acquired before 1 February 2018, cost of acquisition is the higher of actual cost and the lower of the 31 January 2018 fair market value and the full value of consideration.
• Intraday equity is speculative business income; F&O is non-speculative business income — the distinction that drives turnover, audit thresholds, set-off and carry-forward.
• Buyback taxation flipped twice in eighteen months. Tender proceeds were deemed dividend from 1 October 2024 to 31 March 2026; from 1 April 2026 they are capital gains again with cost of acquisition allowed, which is why SEBI could reopen the exchange route under SEBI/LAD-NRO/GN/2026/306 from 1 August 2026.
• The depository reports your capital gains, not your broker. Depositories file SFT-2517 (capital gains on transfer of listed securities and mutual-fund units) under section 508(1) read with rule 237(6), half-yearly; the format and procedure were notified by DGIT(S) Notification No. 1 of 2026 dated 10 September 2026. [AI inference — verify before acting]
• STT rose on 1 April 2026 under the Finance Act 2026: option sale 0.15% of premium (from 0.10%), exercised option 0.15% of intrinsic value (from 0.125%), futures sale 0.05% (from 0.02%), per the NSE STT computation page.

Conceptual overview

The broker’s role in a client’s tax position is narrow and often misunderstood. It computes and collects statutory levies at the point of trade — securities transaction tax, stamp duty, goods and services tax on its own services — and withholds tax only where the law makes it the deductor, which for a resident equity client is essentially never. It then hands the client convenience reports: a tax profit-and-loss report, a capital-gains report, and for some client types a withholding certificate. None is a return, none is authoritative against the Income-tax Department, and none is reconciled against the client’s other brokers.

The authoritative feed runs on a different path. Depositories report capital gains on listed securities and units; AMCs and mutual-fund registrars report folio transactions; companies report dividends; banks report interest. All of it lands in the taxpayer’s Annual Information Statement, which the taxpayer must reconcile. The broker appears there only indirectly — through the depository holding the client’s beneficial-owner account, and through any withholding it actually performed.

The gap between those two paths is where nearly all client friction lives, and reconciling it is the client’s obligation while explaining it is the broker’s.

1. Regulatory framework

• Income-tax Act, 1961 — governs transactions up to 31 March 2026: section 111A (STCG on STT-paid listed equity), 112A (LTCG on the same, with the Rs.1,25,000 exemption and 31 January 2018 grandfathering), 112 (LTCG on other assets), 115AD (foreign portfolio investors), 43(5) (speculative transactions and the derivatives exclusion), 72, 73 and 74 (carry-forward), 44AB (audit), 44AD (presumptive), 194 and 195 (withholding), and 285BA with rule 114E (statements of financial transactions).
• Income-tax Act, 2025 — in force from 1 April 2026. Capital-gains rate provisions sit in the 196 to 203 range, section 196 carrying the eligible short-term rate and section 198 the eligible long-term rate with the Rs.1,25,000 threshold; presumptive taxation is consolidated into section 58; non-resident withholding is section 393(2); statements of financial transactions are section 508. [AI inference — verify before acting]
• Income-tax Rules, 2026 — rule 237 replaces rule 114E for statements of financial transactions. [AI inference — verify before acting]
• Finance (No. 2) Act, 2024 — from 23 July 2024: STCG on STT-paid listed equity 15% to 20%, LTCG 10% to 12.5%, the section 112A exemption Rs.1,00,000 to Rs.1,25,000, holding periods simplified to 12 months for listed securities and 24 months for other assets, and deemed-dividend treatment of buyback proceeds from 1 October 2024.
• Finance Act, 2025 — resident dividend withholding threshold under section 194 raised from Rs.5,000 to Rs.10,000 a year per company.
• Finance Act, 2026 — derivative STT rates raised from 1 April 2026; capital-gains treatment of buyback consideration restored.
• CBDT Circular No. 768 dated 24 June 1998 [not yet in index] — first-in-first-out is the basis for identifying dematerialised securities transferred out of a demat account.
• DGIT(S) Notification No. 1 of 2026 dated 10 September 2026 [not yet in index] — format, data structure and submission procedure for SFT-2517 (depository transactions).

2. Head of income by activity

Activity	Head of income	Provision (1961 / 2025)	Key consequence
Delivery equity, held as investment	Capital gains	111A and 112A / 196 and 198	Concessional rates; STT not deductible from the gain
Intraday equity (squared off same day, no delivery)	Speculative business income	43(5) / equivalent	Loss set off only against speculative income; carry-forward 4 years
Equity and index F&O on a recognised exchange	Non-speculative business income	proviso (d) to 43(5) / equivalent	Loss set off against any business income; carry-forward 8 years
Debt mutual funds acquired on or after 1 April 2023	Deemed short-term capital gains	50AA / equivalent	Slab rate irrespective of holding period
Dividend	Income from other sources	56 / equivalent	Slab rate; withholding at 10% above Rs.10,000 for residents
Buyback consideration, from 1 April 2026	Capital gains	Income-tax Act, 2025 as amended by Finance Act 2026	Cost of acquisition allowed against the consideration
Buyback consideration, 1 October 2024 to 31 March 2026	Deemed dividend	2(22)(f)	Full consideration taxed; cost claimable as a capital loss

Classification is the client's, and it is sticky

Whether delivery equity is a capital asset or stock-in-trade is the client’s characterisation, not the broker’s, and a client who has consistently treated delivery as investment cannot re-characterise a bad year as business to access set-off. Brokers who label a report “Tax P&L” and present capital gains and business income in a single netted total invite exactly that error. Present the two heads separately, with intraday and F&O separated from each other, and carry a line saying the classification is the client’s to make.

3. Capital gains mechanics

Item	Listed equity / equity-oriented units, STT paid	Unlisted shares	Debt and other listed securities
Long-term threshold	More than 12 months	More than 24 months	More than 12 months
Short-term rate	20%	Slab	Slab
Long-term rate	12.5% above Rs.1,25,000 a year	12.5% without indexation	12.5% without indexation
STT treatment	Not deductible in computing the gain	Not applicable	Not applicable
Grandfathering	Yes, for acquisitions before 1 February 2018	No	No
Identification of shares sold	FIFO per demat account	FIFO / specific identification	FIFO per demat account

Grandfathering arithmetic. For a share acquired before 1 February 2018 the deemed cost is the higher of actual cost and the lower of the 31 January 2018 fair market value and the sale consideration — so gains accrued up to 31 January 2018 are untaxed, and a sale below the 31 January 2018 value cannot manufacture an artificial loss.

FIFO is per demat account, not per broker. The same scrip in two demat accounts has two independent FIFO queues. Transferring holdings between the client’s own accounts resets nothing legally, but the broker’s report for the receiving account will show the transfer-in date unless the client supplies the original cost — the commonest cause of an overstated short-term gain.

4. Section mapping across the two Acts

Subject	Income-tax Act, 1961	Income-tax Act, 2025
STCG on STT-paid listed equity	111A	196
LTCG on STT-paid listed equity and equity-oriented units	112A	198
Presumptive business income	44AD, 44ADA, 44AE	58
Withholding on payments to non-residents	195	393(2)
Withholding on dividend to residents	194	393(1)
Statement of financial transactions	285BA with rule 114E	508 with rule 237
Forms: SFT, non-resident withholding return, nil-withholding declaration	61A, 27Q, 15G and 15H	165, 144, 121

The mapping is drawn from secondary commentary, not a CBDT correspondence table; confirm the operative section before using it in a client communication. [AI inference — verify before acting]

5. F&O and intraday as business income

Once derivatives income is business income, three obligations follow that a capital-gains client never meets.

Turnover. For derivatives, turnover is conventionally the sum of absolute profits and losses on settled contracts plus premium received on sale of options plus any difference on exercise or assignment — the ICAI Guidance Note on Tax Audit position, not notional contract value. [industry practice — unverified]

Audit. Section 44AB bites at turnover above Rs.1 crore, raised to Rs.10 crore where at least 95% of receipts and 95% of payments are non-cash, the normal case for an exchange-traded book. Declaring profits below the presumptive rate while having taxable income, or opting out after opting in, forces audit regardless of turnover.

Presumptive taxation. Section 44AD (section 58 from 1 April 2026) lets an eligible business with turnover up to Rs.2 crore — Rs.3 crore where cash receipts stay within 5% — declare 8% of turnover as income, or 6% where receipts are digital. Opting out within five assessment years disqualifies the assessee for the next five and triggers audit.

Set-off and carry-forward.

Loss type	Set off in the same year against	Carry-forward	Set off in later years against
Speculative business loss (intraday equity)	Speculative income only	4 years	Speculative income only
Non-speculative business loss (F&O)	Any income except salary	8 years	Business income only
Short-term capital loss	STCG and LTCG	8 years	STCG and LTCG
Long-term capital loss	LTCG only	8 years	LTCG only

Carry-forward in every case requires the return to be filed by the due date.

6. Non-resident clients

A non-resident’s Indian securities income is withheld at source, which makes the payer — not the client — the compliance point. For dividends that is the company or its registrar; for capital gains it depends on the client category and the custody arrangement.

Payment	Rate before surcharge and cess	Provision (1961 / 2025)	Notes
Dividend to a non-resident individual or foreign company	20%	195 / 393(2)	Reducible under a double-taxation avoidance agreement on a tax-residency certificate plus Form 10F
Dividend to a resident	10% above Rs.10,000 a year per company	194 / 393(1)	Threshold raised by the Finance Act 2025
Any other sum chargeable, including capital gains, to a non-resident	Rate applicable to the income	195 / 393(2)	No threshold — withholding applies from the first rupee
FPI capital gains and dividend	20% STCG, 12.5% LTCG on listed equity; 20% dividend	115AD, 196D / equivalent	Custodian-operated withholding; see the FPI material in the account-variants section

Two mechanics matter operationally. A lower or nil withholding certificate shifts the rate for that payee only and must be with the deductor before payment. And the quarterly non-resident withholding return — Form 27Q under the 1961 Act, Form 144 under the 2025 Act — carries payee-level detail including tax-residency country, so residency evidence must be collected before the quarter closes.

7. What the broker actually produces

Field	Type	Length	Mandatory	Source system	Destination system(s)	Notes
pan	alphanumeric	10	Yes	KYC master	Client report, withholding return	Report is keyed on PAN, not on UCC
isin	alphanumeric	12	Yes	Back office	Client report	Survives scrip renames and corporate actions
buy_date	date	8	Yes	Back office	Client report	Acquisition date; blank for unknown transfer-in lots
buy_rate	decimal	15,4	Yes	Back office	Client report	Excludes STT; brokerage included only if the client elects
sell_date / sell_rate	date / decimal	8 / 15,4	Yes	Back office	Client report	Transfer date and realised rate
fmv_31jan2018	decimal	15,4	Conditional	Market data feed	Client report	Mandatory where buy_date precedes 1 February 2018
grandfathered_cost	decimal	15,2	Conditional	Computed	Client report	Higher of cost, and lower of FMV and consideration
gain_type / realised_gain	code / decimal	4 / 15,2	Yes	Computed	Client report	STCG, LTCG, SPEC or NSPEC, with the signed amount
stt_paid	decimal	15,2	Yes	Back office	Client report	Disclosed but not deducted in the capital-gains computation
turnover_for_44ab	decimal	15,2	Conditional	Computed	Client report	Derivatives only; state the basis used

A well-built report also carries an explicit “lots with unknown cost” section — the transfer-in and corporate-action lots the broker could not price — because that list is what the client must complete before filing.

8. Who reports what to the Income-tax Department

Reporting entity	Statement	What is reported	Cadence
Depositories (CDSL, NSDL)	SFT-2517 — depository transactions	Capital gains on transfer of listed securities and units, with ISIN, quantity, consideration, cost, 31 January 2018 fair market value, acquisition and transfer dates	Half-yearly: period to 30 September due 31 October; period to 31 March due 30 April
AMCs and mutual-fund registrars	SFT for mutual-fund transactions	Purchases and redemptions of units	Annual
Companies and their registrars	SFT for dividend	Dividend paid, per payee	Annual
Stock brokers	No capital-gains SFT obligation	Brokers file withholding returns where they are deductors, and respond to notices; they do not file the capital-gains statement	As applicable

All of it aggregates into the taxpayer’s Annual Information Statement on the compliance portal, with the condensed Taxpayer Information Summary above it and the withholding record in Form 26AS. The client reconciles; the broker explains.

Why the AIS gain never matches the broker report

The depository computes gains on the whole beneficial-owner account — off-market receipts, gifts, transmissions and corporate-action lots included — and prices lots from its own data. The broker computes gains only on the trades it executed. A client with one demat account, one broker and no off-market activity should see the two agree; every other client will not. Point at the mismatch categories, not the arithmetic.

9. Alternatives

Option A — broker tax report	Option B — independent computation from CAS plus contract notes	When to pick which	Who uses what
Free, instant, trade-level accurate for that broker	Complete across brokers and demat accounts, includes off-market and gifted lots	A for a single-broker investing client; B once there is a second broker, an off-market transfer or inherited stock	Most retail clients use A; anyone with a transmission or gift history needs B
Broker’s FIFO and cost conventions	Client’s own conventions, defensible on record	B where brokerage-in-cost or unknown-lot treatment moves the figure	Clients near the Rs.1,25,000 threshold
No audit or presumptive analysis	Supports the 44AB and 44AD decision	B for any derivatives book of size	Active derivatives traders

Practical notes

• [gotcha] The Rs.1,25,000 long-term exemption is per person per financial year, not per broker and not per scrip. A client with three brokers gets three reports each applying the full exemption, and the sum overstates the exemption threefold.
• [gotcha] Securities transaction tax is disclosed on the contract note but is not deductible in computing a capital gain, while it is an allowable expense where the activity is business income — which is why the two heads must never share a computation path.
• [gotcha] Transfer-in lots are the largest source of wrong broker-generated gains: for holdings received by off-market transfer, closure-with-transfer, gift or transmission, the acquisition date and cost must come from the client, because the broker sees only the credit date.
• [risk trade-off] A single “Tax P&L” number is what clients ask for and what produces mis-filed returns; the defensible design refuses to net across heads and says on its face that classification is the client’s decision.
• [gotcha] Non-resident clients with a double-taxation agreement claim need the tax-residency certificate and Form 10F on record before the payment, not at assessment. A certificate produced afterwards does not undo a 20% withholding; it becomes a refund claim. See Lifecycle: NRI conversion and the NRI deep dive.
• [cost optimization] Harvesting to sit just under the long-term exemption and re-acquiring is legal and common, but each round trip pays the 2026 STT rates plus brokerage and stamp duty and resets the FIFO queue; the break-even is narrower than clients assume.

Cross-references

• Funds & Tax: Ledger and statements — the source documents the tax report is built from.
• Funds & Tax: Corporate actions — events that change cost basis and head of income.
• Funds & Tax: Demat servicing — off-market transfers and gifts that break cost basis.
• Funds & Tax: Brokerage and charges — the STT, stamp-duty and GST lines.
• Deep Dive: ECN and investor-servicing artefacts — contract note cum tax invoice and annual statement.
• Field Atlas — Computed ECN tax fields — per-trade statutory-charge fields.
• Field Atlas — Regulatory reports destination — reporting obligations mapped field by field.
• Lifecycle: NRI conversion — residency change and withholding.
• Appendix: NRI deep dive — repatriation, PIS and residency documentation.
• Lifecycle: Transmission — inherited lots and their cost basis.
• Deep Dive: Mutual fund platforms — demat versus statement-of-account reporting paths.
• Circulars — SEBI other — the buyback amendment regulations.

Verified through

2026-09-11

---

AI-generated and not legal, financial, or compliance advice. See the project README for full disclaimer.