Are equity investments really tax-efficient? That is a question that many investors have. To begin with, equity investment is not your typical Section 80C investment that gives you a tax exemption. But there are quite a few benefits that you can avail from investing in equities. Let us look at some of them.
Tax exemption under Section 80CCG for RGESS investments
The Rajiv Gandhi Equity Savings Scheme (RGESS) was launched in the 2012 Budget to incentivize small and first-time investors to participate in the equity markets. Under this scheme, new investors in equities with an annual income of up to Rs12 lakh can avail exemption to the tune of 50% of the amount invested in equities subject to a maximum of Rs50,000. So if a first-time investor allocates Rs50,000 to equities, then an exemption of Rs25,000 can be deducted under Section 80CCG from the total taxable income. This benefit can be availed over a period of three years.
ELSS investments for claiming Section 80C investments
This is not direct equity but an indirect equity investment. Equity-linked savings schemes (ELSS) are equity mutual funds that come with a 3-year lock-in period. Investments up to Rs1.50 lakh per financial year can be claimed under this section. However, it needs to be noted that Rs1.50 lakh is an umbrella exemption limit and includes other investments and outlays, including PPF, CPF, long-term deposits, ELSS, ULIPs, tuition fees, life insurance premium, the principal component of a home loan, etc. All investments in ELSS funds are subjected to a mandatory lock-in period of 3 years from the date of investment.
Preferential treatment for short-term capital gains on equities
The reason equities become tax-efficient is that they get preferential treatment when it comes to short-term capital gains. Firstly, the definition of short-term gains is if the equity is held for less than a year. For other assets, it varies from 2 to 3 years. Secondly, the rate of short-term capital gains tax on equities is also lower. While STCG on other assets is levied at the peak rate applicable to the taxpayer, STCG on equities is charged at a concessional rate of 15%.
Preferential treatment for long-term capital gains on equities Like in the case of STCG, long-term capital gains also get preferential treatment in terms of tenure and the rate of taxation. For most assets, the definition of LTCG is a minimum holding period of 2 years or 3 years. However, in the case of equities, the definition of LTCG is if the equity stock has been held for more than a year. What about rates? Till March 2018, LTCG on equities were entirely tax-free in the hands of the investor. However, effective April 2018, LTCG on equities is being taxed at a flat rate of 10%. Of course, there is a basic exemption of Rs1 lakh that is available for each financial year but the downside risk is that it comes without the indexation benefit. That has surely reduced its relative attractiveness.
What about dividends? Compared to interest income, dividends continue to be relatively less burdensome. However, there are three things to remember. Firstly, dividends are post-tax appropriation. Secondly, dividends are subject to dividend distribution tax (DDT) of 15% plus surcharge and cess. This reduces the dividends in the hands of the investor. Lastly, effective April 2016, dividends beyond Rs10 lakh are additionally taxable in the hands of the investor at the rate of 10%. That needs to be factored in!
Avail tax deductions & exemptions on stock investments
Investing in equity not only helps you diversify your portfolio but also fetches high returns in the long term. Investing in equity also offers various tax exemptions and deductions which you can avail of on your stock market investments.
Listed below is a comprehensive picture of the deductions and exemptions that you are entitled to in various stock instruments, whether you invest directly or indirectly.
- Investing Directly in Equity
- Stocks
- No lock-in period.
- Long-term capital gains (investments held for up to 12 months) are taxed at 10%.
- Short-term capital gains (investments held for less than 12 months) are taxed at 15% Any capital loss after the offset can be carried forward up to eight financial years.
- Short-term capital gains can be offset against short-term losses.
- Short-term capital loss can be offset against any capital gain—long term or short term.
- Long-term capital loss can be offset only against a long-term capital gain.
- Both long-term and short-term capital losses can't be offset against income from any other source.
- Dividends are tax-free but bonus shares are taxed if sold within a year.
- Investing Indirectly In Equity
- Mutual funds: Equity & balanced
- No lock-in period.
- Long-term capital gains up to 1 lakh are tax-free.
- Short-term capital gains are taxed at 15%
- Short-term capital gains can be offset against short-term losses.
- Short-term capital losses can be carried forward for up to eight years.
- Dividends received are tax-free.
- Equity linked savings scheme
- A lock-in period of three years.
- An investment of up to Rs. 1 lakh gets deduction under Section 80C.
- Long-term capital gains are tax-free.
- Dividends received are tax-free.
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