InvestorQ : What are the tax implications of investing in equity shares?
Arti Chavan made post

What are the tax implications of investing in equity shares?

Anu Biswas answered.
3 years ago

One of the main reasons equities are attractive compared to other asset classes is the favourable tax treatment that it gets. This tax shelter on equities has to be understanding at 3 levels…

Dividends declared on equity shares are entirely tax-free in the hands of the investors. Effective the Union Budget 2016, any investor who earns more than Rs.1 million as dividends on equities has to pay an additional 10% tax. However, most small and medium sized investors will remain outside the ambit of taxation of dividends.

Secondly, we need to understand the aspect of tax on capital gains. When you make a profit on sale of equity shares you have to pay capital gains tax. But for that you first need to understand long-term and short-term capital gains on equities. Under the Income Tax Act, equity gains are long term in nature if they are sold after being held for more than 1 year. Long term Gains used to be entirely tax free in the hands of the investor till March 2018. However, Budget 2018 imposed a 10% flat tax on long term capital gains exceeding Rs.1 lakh per financial year without benefit of indexation. Equities held for less than 1 year are classified as short term gains and taxed at a concessional rate of 15%. Thus equities have an advantage in the classification of long term capital gains and on the rate of tax compared to other asset classes.

There is a third benefit on equities which is restricted to the ELSS (Equity Linked Savings Schemes) of mutual funds. Amounts invested in ELSS are eligible for tax exemption up to an outer limit of Rs.1,50,000/- per annum. This substantially enhances the post-tax yield on such investments.