How To Receive Tax Benefits From Equity Investment

02 Mar, 2021

8 min read

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How to Gain Tax Benefits from Equity Investment? - Smart Money
When we think about equity investment, the first thing that comes to our mind is growing wealth via investing in company shares.

Tax saving isn’t a thing that we usually associate with equity investing. However, there are ways by which you can claim tax benefits for investing in shares, and we are going to discuss the top ways to do so. 

Tax benefits of Equity Investments

0% DDT, Higher Dividend

Earlier domestic corporations and mutual fund companies used to deduct 15 percent (plus applicable surcharges or CESS) DDT (Dividend Distribution Tax) before paying out dividend to investors. This has changed in FY20-21. 

What’s a dividend? A dividend is a part of a company’s profit, which it distributes between its investors yearly or half-yearly. Dividends are paid regularly and hence, creates a secondary source of income for the investor. The best part is, you can now receive higher dividend rate since DDT has been removed. 

Let’s understand with an example. 

Investor A  invested in dividend stocks of company XYZ, which pays an annual dividend of Rs 100. Earlier DDT of Rs 15 got deducted at source and investors received Rs 85 in hand. Under the new tax regime, investor will receive Rs 100 as dividend. All one needs to do is declare it as income in Form 16 and tax rate will apply as per income tax slab.  

 Tax advantage, along with attractive return makes equity investment most desirable to investors. If you haven’t started investing in equities yet, it is the right time to do so.

No Worries About Long Term Gain

Of course, you would like to earn a dividend, but what about profit? The purpose of investing in equities is to trade those when the market is right. So, is there tax on the profit you earn from selling stocks at a high price? 

Profit from stock trading is called a capital gain. It is split into two categories – short-term and long-term. When you hold an investment for more than a year, it qualifies under long-term capital gain, which is tax-free below Rs 100000. Please keep in mind, tax at 15 percent rate will apply when you sell the shares before twelve months. 

Further, there is a provision to carry forward capital loss to offset gain from a trade in the future to lower tax burden. Hence, you can offset short-term gain with a short-term capital loss or a long-term gain with long-term loss. For that matter, you can also carry forward a loss incurred during a year for the next eight years, provided you file tax on time. 

How does it work? Suppose you have made a short-term gain from the selling of securities within six months of purchasing. Now, suppose during the same time, you also incur a series of losses from other investments you can utilise the loss to offset the capital gain tax arising from the profit and eventually save tax.    

Carrying Forward Capital Loss To Offset Gain

As we have mentioned above, one can utilise the loss incurred from a distress sell of securities to offset a capital gain. Investors can carry forward the loss to the next year to adjust against a capital gain. One can continue to advance the loss for eight years to offset a profit arising from the same kind of investment, meaning you can utilise a loss arising from selling shares to offset a gain from selling shares and minimise your tax burden by doing so. 

The Miracle Called Equity Linked Saving Plans

Equity linked saving schemes offer the best of both worlds, along with a fabulous range of tax advantages. By investing in these saving schemes, you can save taxes under section 80C. 

Under section 80C investors can save taxes from salaries, business, or real-estate if the investment is made through ELSS plans for up to Rs 1.5 lakhs. You can invest through ELSS and save up to Rs 46,000 a year on taxes. 

key features of an Equity Linked Savings Plan

  • Lock-in period of three years 
  • Deduction under 80C for up to Rs 1.5 lakh 
  • Receive benefits of long-term capital gain tax reduction 
  • Dividend received will not attract DDT from FY20-21

Rajiv Gandhi Equity Savings Scheme

Rajiv Gandhi Equity Savings Scheme is a good option for beginner investors. You can earn an additional tax benefit of Rs 50,000 by investing in this scheme. Here are the key points to remember to invest under the Rajiv Gandhi Equity Savings Scheme.

  • The scheme is available only to first-time investors with income less than Rs 12 lakh 
  • Unlike, investing directly in equities, which doesn’t have any lock-in, investors in the scheme have to remain invested for a minimum period of three years 
  • Also one can’t sell share during the first year. Afterwards, investors can sell securities, but the proceeds from it need to be reinvested
  • The scheme offers tax benefits to first-time equity investors over and above the original limit of Rs 1 lakh available u/s 80C 
  •  Investors can claim tax relief on 50 percent on the investment amount, up to Rs 50,000 on specific shares 

Tax saving remains one of the primary concerns for investors. But most of them don’t take up the task until very late. If you plan with time, carefully weighing all the different tax saving options and selecting the right one,  you can avoid paying excess tax.

Investing in equities doesn’t only help you diversify portfolio but also fetches high return, which places it in the high pedestal of investment. But not many are aware that stock investment can also help in saving taxes. Now that you have learnt about the tax benefits of equity investment do smart planning and save taxes.

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