Tax Planning Guide: How Equity Investments are Taxed

What are Equity Investments or Shares?

A range of investment opportunities are available for investors looking to maximize their tax benefits and reduce the losses incurred on the interest and income they earn from investments. Among these, equity investments are an especially popular option. Equity shares refer to the shares of a company listed on an exchange, available for the public’s purchase and sale. While equity instruments can, at times, be considered risky due to the volatile nature of the market which is dependent on a host of factors including economic and geographical factors, they are also hugely popular owing to the tax benefits they offer.

Understanding Tax Benefits on Equity Shares

For investors aiming at achieving superior tax planning through their investments, equity instruments form a major part of their investment portfolio. While attempting to understand tax planning through activities in the equity market, it is important to know about the securities transaction tax or STT. The STT is levied on all shares which are bought or sold on any registered stock exchange. This tax forms a mandatory part of the sale or purchase of any equity stocks conducted on registered stock exchanges. 

Apart from this, the income earned from sale of equity shares is liable to taxation as well. Two kinds of losses and gains are registered while dealing with sale of equity shares. These include long-term capital gains and losses as well as short-term capital gains and losses. Short-term capital gains or losses come into play if the shares bought by the investor are sold within a period of 12 months from the date of purchase. On the other hand, long-term capital gains and losses come into play when the date of sale of the equity shares held by an investor is post 12 months from the date of its purchase. Short-term capital gains are taxed at a rate of 15%, regardless of the income tax slab you fall under. If upon excluding the short-term capital gains, your income falls under the exemption limit of Rs. 2.5 lakh, the shortfall in this income can be adjusted against the short-term capital gains earned. The remaining portion of the short-term gains will then be taxed at a rate of 15% along with the mandatory cess of 4%. 

For long-term capital gains, the Union Budget 2018-19 was a game changer. Previously, Section 10(38) of the Income Tax Act exempted long-term capital gains from any sort of tax. This held true for both sale of equity shares or even the equity-oriented units within mutual fund portfolios. However, the Union Budget 2018-19 saw introduction of a 10% tax on long-term capital gains which exceeded Rs. 1 lakh. Even now, long-term capital gains below the Rs. 1 lakh limit continue to not be taxed. The benefit of indexation is no longer available on these gains either.

Mutual Funds vs Equity Shares

Mutual funds are another investment instrument, which incorporate equity funds substantially. Mutual funds are a very popular investment instrument, owing to the huge returns they can generate for investors and the diversity they offer, which can substantially reduce the risks associated with holding only equity stocks. Equity shares are susceptible to market volatility, which can be caused due to a host of factors including economic and political uncertainty. Changes in banking regulations across the globe can also affect the equity market, either negatively or positively, and result in volatility in the market. As a result, a mutual fund which is diversified through investment into other instruments along with equity funds are a substantially safer bet for investors. 

Mutual funds also offer tax benefits for those aiming at achieving optimum tax planning measures. Even mutual funds which invest primarily in equity funds are eligible for the same tax benefits as those available on the long-term capital gains, which includes a tax liability of 10% on gains higher than Rs. 1 lakh. For short-term capital gains on mutual funds which include equity shares, the regular taxation liability of 15% along with the additional cess of 4% are applicable. 

When you invest with an eye on tax planning measures, as a general thumb rule, it is advisable to thoroughly examine your options before making the investment.

Alternatives to equity investments and shares

So investors, over the years, have always tended to favour instruments that avail not just the best returns, but also the best tax benefits. And while tax benefits on equity are huge, insurance policies such as life insurance or cancer insurance plans are also increasingly sought after owing to the enormous tax benefits they offer to policyholders and their beneficiaries. Browse the website to know more about Term Insurance and the various Term plans offered by PNB MetLife.

The income tax is levied on all earning individuals who fall under a taxable income bracket. The income tax is paid to the Government of India and is charged annually. However, there are several tax deductions and exemptions that you can claim to lower your tax liability. The Income Tax Calculator helps you ascertain your tax output for a financial year based on your taxable income. This can help you plan well and save tax using the tax-saving deductions and exemptions, if possible. 

Disclaimer: 
The aforesaid article presents the view or an independent writer who is an expert on financial and insurance matters. PNB MetLife India Insurance Co. Ltd. doesn’t influence or support views of the writer of the article in any way. The article is informative in nature and PNB MetLife and/ or the writer of the article shall not be responsible for any direct/ indirect loss or liability incurred by the reader for taking any decisions based on the contents and information given in article. Please consult your financial advisor/ insurance advisor/ before making any decision.

PNB MetLife India Insurance Company Limited, Registered office address: Unit No. 701, 702 & 703, 7th Floor, West Wing, Raheja Towers, 26/27 M G Road, Bangalore -560001, Karnataka.
IRDAI Registration Number 117. CI No: U66010KA2001PLC028883. For more details on risk factors, terms and conditions, please read the sales brochure carefully before concluding the sale.
The marks “PNB” and “MetLife” are registered trademarks of Punjab National Bank and Metropolitan Life Insurance Company, respectively. PNB MetLife India Insurance Company Limited is a licensed user of these marks.
Call us Toll-free at 1-800-425-6969. Phone: 080-66006969, Website: www.pnbmetlife.com, Email: indiaservice@pnbmetlife.co.in or Write to us: 1st Floor, Techniplex -1, Techniplex Complex, Off Veer Savarkar Flyover, Goregaon (West), Mumbai – 400062, Maharashtra. Phone: +91-22-41790000, Fax: +91-22-41790203
EC216 LD/2019-20/227

BEWARE OF SPURIOUS/FRAUD PHONE CALLS!
• IRDAI is not involved in activities like selling policies, announcing bonus or investment of premiums. Public receiving such phone calls are requested to lodge a police complaint.