The start of a new financial year, presents an opportunity to relook at your investment goals. Before making fresh investments, you must consider the tax implication involved. If investing in equities is one of your goals, you can do so via direct equity purchasing or through mutual funds.
Let’s understand the tax implications involved in equity investments.
Investing directly in stock markets
When you purchase equity shares from a stock exchange, calculating tax on gains is fairly simple. You don’t have to pay any tax on gains from sale of equity shares held for more than 12 months. If you incur a loss, such a loss has no tax treatment.
When equities are sold within 12 months of holding them, your gains are considered short term. Short-term gains are taxed at 15%. This special rate of 15% applies irrespective of your tax slab. Also, if your total taxable income without including short-term gains is less than the minimum exemption limit i.e. Rs 2,50,000— you can adjust this shortfall against your short term gains.
Remaining short-term gains shall be taxed at 15% + 3% cess. If your total income including short-term gains is less than Rs 2,50,000 you do not pay any tax. Any short-term loss can be set off against short-term capital gains or long-term capital gains from any capital asset. If you have not been able set off this loss entirely in the year it is incurred, you are allowed to carry it forward for eight years. You can then adjust it from your short term or long term capital gains in future, in any of these eight years. Do remember to report these losses in your income tax return.
Dividend income from equity shares is exempt from tax, unless your dividend income exceeds `10 lakh in a financial year. If so, such excess (and not total dividend) is taxed at 10%.
Investing via mutual funds
Mutual funds are sold with fancy names which can be confusing for many. To find out how gains from sale of mutual funds are taxed, you can follow a simple principal. Find out where your mutual fund primarily invests. A mutual fund is either equity-based or debt-based. Equity funds invest at least 65% of their holdings in equities. All others are debt funds. Equity funds are taxed exactly the same way as gains from direct purchasing of equity shares, discussed above.
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Debt funds are short-term when sold within three years of holding them. Short-term gains are taxed like any other income, basically as per tax slab rates applicable.
When debt funds are sold after three years of holding, gains are considered long-term. Long-term gains from debt funds are taxed at 20% and the purchase price is indexed for calculating gains. Which means you have to multiply purchase price with CII of the year of sale and divide it with CII of the year of purchase. CII is the cost inflation index and it helps align your cost according to inflation. Earlier taxpayers had a choice of indexing the cost, but effective July 11, 2014, indexation of cost is mandatory to calculate long-term gains from debt funds.
The author is a chartered accountant and chief editor at www.cleartax.in