While dividends have been discussed in detail, a more common and regular source of income in the equity markets is the capital gain. How do capital gains arise? They arise when you sell a capital asset at a price that is higher than the acquisition price. Capital gains arise when you sell a stock at a price that is higher than the price of purchase. For example, if you buy a stock at Rs.200 and sell the stock at Rs.210, then the profit of Rs.10 becomes capital gains in the hands of the investor. To this profit you can also charge incidental expenses like brokerage and other legal and statutory charges, except STT. Capital gains tax is charged on the profit that is booked and never charged on notional profit. For example, if you buy a stock worth Rs.55,000 and the value of these stocks appreciates to Rs.2,50,000 in 5 years time, there will be no tax unless you book the profits and the profit actually comes into your account. Capital gains taxation is all about booked profits and not about book profits. You need to actually realize the profits into your bank account or trading account.