How equity investing is tax efficient for investors?

Long term equity investments were tax free in India till 2018. Now they are taxed at 10% of the gains, of which the Rs 1,00,000 is exempt. When compared to alternative safe havens, investing in equities shares offers a better rate of return, which helps investors beat the inflationary pressure. Indeed, there are many benefits to investing in stock.

What are Equity Shares?

The total capital of the company is divided into smaller units known as equity shares in a company form of organization. Dividends and capital growth are two ways that equity investors might profit. The owners of such shares receive not only financial advantages but also voting rights in important corporate decisions. In essence, they are viewed as owners of the business, however their ownership is only as great as the shares they own.

Tax Benefits of Equity Investment

It’s not just how much money you make that matters when it comes to investing; it’s also how much money you keep after taxes. Anything you can do to lessen the burden will help because even tiny sums may quickly add up to a lot over time. Indeed, there are many benefits to investing in stock. Let’s look more closely at the tax advantages of equities investment.

Concerns over long-term capital gains are unimportant.

Dividends are unquestionably a plus for a potential shareholder when it comes to profiting from the investment. But there is still another source of income connected to the purchase of equity shares. The profit you make when you sell your shares to another shareholder for a greater price, is what is referred to as capital gains

For equity investors, capital gains are a key incentive for investment. Capital gains is the difference between the selling price and purchase price of the equity share. The length of time you invested in the stocks affects the capital gains tax rate. You make short-term capital gains when you sell an equity share that is listed on a reputable stock market within a year of the date of purchase. These items will be subject to a 15% tax.

On the other hand, you will realise long-term capital gains if you sell a listed equity share after a year from the date of acquisition (LTCG). Over Rs 1lac, LTCG is subject to a 10% tax rate, without the advantage of indexation.

The option of offsetting capital gains

The ability to deduct capital gains from taxes is a significant additional tax advantage for stock investments. Short-term capital losses from one investment may be used to balance short-term capital profits. By selling your shares within one year, you might have generated short-term capital gains.

However, if you have sustained a string of losses on other types of investments, you can use the short-term capital loss from the selling of stocks to balance the capital gains from the sale of stocks. You can accordingly save on your taxes.

Increase Tax Benefits with ELSS (Sec 80C)

Using an equity linked saving plan might provide you access to a wide range of tax advantages. These have a lock-in period of three years and long-term capital gains tax are applicable after this period., Investing through an equity linked savings plan can provide you with numerous chances to reduce your taxable income in accordance with Section 80 C.

When an investment is made through an Equity Linked Savings Scheme (ELSS), it is one of the few equity instruments available to get tax exemptions under Section 80C.

Rajiv Gandhi Equity Saving Scheme

It is both a tax-saving and equity scheme designed to cover small investors whose yearly gross income is below a specific threshold. It was created for inexperienced retail investors who lacked prior experience in the securities market in India.

The maximum amount that new retail investors may invest in qualifying securities was Rs. 50,000, and they were eligible for a 50% tax deduction on up to Rs. 25,000 in a single fiscal year for up to three consecutive years.

Investors may take advantage of tax incentives provided by the new section 80CCG of the Income Tax Act under RGESS. There is no set minimum investment amount. Tax advantages are available for three years starting with the fiscal year in which the initial investment is made under the programme. If one withdraws the funds or doesn’t meet any of the requirements, they risk losing the tax benefits.

There are two major advantages to being aware of the tax obligations associated with the profits from different investments. First of all, investors will be able to foresee the eventual returns on their investment. Second, by paying taxes on time, there is a substantially lower possibility of getting audited or receiving a notification from the Income Tax Department. Long-term, this can assist the investor save a considerable amount of time and work.

How are long-term capital gains calculated?

For the sake of understanding calculation of capital gains on equity investments, let us assume that equity investments worth Rs 5,00,000 were made two years ago. The value of those investments as on date has grown to Rs 8,00,000.

The investor decides to sell the equity investment and take home the gains. In essence, the investor has gained a total of Rs 3,00,000 on his investment. Since it was held for more than a year,the gains will qualify for long term capital gains tax.

Long term capital gains have an exemption upto Rs 1,00,000, so the net taxable amount would now be Rs 2,00,000. This will taxed at 10%, so the investor will end up paying Rs 20,000 as capital gains tax. Equity investing is end up paying about 10% as capital gains tax, whereas the tax on other instruments is much higher.

 

About the Author

Ketan Sonalkar (SEBI Rgn No INA000011255)

Ketan Sonalkar is a certified SEBI registered investment advisor and head of research at Univest. He is one of the finest financial trainers, with a track record of having trained more than 2000 people in offline and online models. He serves as a consultant advisor to leading fintech and financial data firms. He has over 15 years of working experience in the finance field. He runs Advisory Services for Direct Equities and Personal Finance Transformation.

Note – This channel is for educational and training purpose only & any stock mentioned here should not be taken as a tip/recommendation/advice

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