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How Much Tax To Pay On Equity Investment? Research Team | Posted On Saturday, April 20,2019, 06:26 PM

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How Much Tax To Pay On Equity Investment?



When you talk equity, it is investments in shares and equity mutual funds. Most investors love equity as it promises high returns. Unfortunately, equity offers high returns at high risk. Invest in equity based on risk profile. Equity is suitable only for aggressive investors willing to bear high risk for high returns.

Equity investments have given very high returns in recent times. Equity is quite safe over long periods of time. Hold equity for at least 5-7 years to earn high returns. Apart from risk, taxes eat up returns from equity portfolio. Different equity assets have different tax rules. Take a look at the effects of tax on equity, before making an investment.

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How Much Tax to Pay on Equity Investment?

Taxation on Income from Selling Shares

Let’s say you buy equity shares which are listed on the stock exchanges like NSE and BSE. If you sell the shares within 12 months, you get short term capital gains (STCG) or maybe short term capital losses.

You have STCG = Sale price of the share – expenses – purchase price. If you sell equity shares listed on a stock exchange after 12 months or more of the purchase, you get long term capital gains or LTCG. You could also incur a long term capital loss.

How are Short Term Capital Gains on Equity Taxed?

The short term capital gains on equity investments are taxed at 15% + 4% cess. What if you fall in the 5% or 20% income tax slab? You still have to pay 15% tax, irrespective of income tax slab. If total taxable income excluding short term gains is less than the minimum threshold income, (This is Rs 2,50,000 for citizens below 60 years of age), adjust the shortfall against short term capital gains. The remaining short term capital gains are taxed at 15% + 4% cess.

How are Long Term Capital Gains on Equity Taxed?

If you stay invested in equity shares for the long-term, (this is 12 months or more) and then sell, gains/profits are called long term capital gains. The long term capital gains on equity shares which are listed on the stock exchange are not taxed up to Rs 1 Lakh. For long term capital gains of more than Rs 1 Lakh, on the sale of equity shares or equity-oriented mutual fund units, there’s capital gains tax of 10%, with no indexation benefit.

SEE ALSO: 3 Ways To Invest In Equity

What is Securities Transaction Tax or STT?

Securities Transaction Tax or STT is applicable on shares, bought and sold on a stock exchange like NSE and BSE. This is applicable for shares listed on stock exchanges.

Taxation on ELSS

Equity Linked Savings Schemes or ELSS are tax saving mutual funds. They are a type of equity diversified mutual fund with most of the investments in stocks. They have a 3 year lock-in period.

After 1st April 2018, any LTCG you make on equity mutual funds including ELSS, (This is for equity oriented mutual funds with equity exposure of 65% or more), is taxed at 10%. This is only for gains above Rs 1 Lakh a year. The LTCG made until January 31st 2018 remains tax-exempt.

Taxation on SIPs in Equity Mutual Funds:

Systematic Investment Plans or SIPs are a method of investing in mutual funds. You invest fixed amounts say once each week, month or quarter in a mutual fund scheme. SIP taxation depends on the type of mutual fund and holding period.

Each individual SIP in equity funds is considered a fresh investment for tax purposes and gains are taxed separately. Let’s say you invest Rs 5,000 a month via SIPs in equity mutual funds for a year. Each SIP is considered to be a fresh investment. If you redeem investments after 12 months, the first SIP is subject to long term capital gains at 10% on gains above Rs 1 Lakh. The remaining gains are subject to short term capital gains tax at 15% + cess.

How does this work? If you or any investor investing in equity mutual funds invests through SIPs and redeems via lump sum after a year, this is how to calculate LTCG. For investments with multiple dates, you have the first-in-first-out rules. This is the units bought first are sold first.

SEE ALSO: What is an Equity Linked Saving Scheme?

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