Equity shares represent ownership in a company, giving shareholders voting rights and a share in profits through dividends. From a tax planning perspective, investing in equity shares can help optimize tax liabilities and maximize returns.
What are equity shares?
In a company, the total business is generally divided into smaller business units known as equity shares. An investor subscribes to the equity shares of the company and contributes to the total capital of the business and becomes a shareholder. The company has to give returns to the shareholders. When an investor is investing in equities they earn in the way of dividends and capital appreciation. With monetary benefits, the equity investors also get voting rights in the company. We can say that the owners are treated as the owners of the company but the scope is limited. Generally, the business issues share when it requires funds for growth and expansion. The investors are offered Initial Public Offering (IPOs), IPOs are offered to the general public for subscription for the first time. Later the shares get listed in the stock exchange and are frequently traded. Once you subscribe to the shares of the company, the record is then maintained at the depositories like the NSDL and CSDL. In case of the company needs to distribute the dividends or bonus shares it will get the list of the shareholders from these depositories and credit the dividends into your bank account.
Tax Implications of Equity Shares
Capital Gains Tax
- Short-Term Capital Gains (STCG): If shares are sold within 12 months, the profit is taxed at 15%.
- Long-Term Capital Gains (LTCG): If shares are sold after 12 months, gains above ₹1 lakh are taxed at 10% (without indexation).
Dividend Taxation
- Dividends received from domestic companies are taxable in the hands of shareholders at their applicable income tax slab rate.
Securities Transaction Tax (STT)
- STT is levied on equity transactions at the time of buying and selling shares in the stock market.
How to invest in equity shares?
There are two ways in which investors can invest in equity shares. Investment in the Unlisted equity shares: The Equity shares which are not listed in any recognized stock exchange are the unlisted equity shares. Once purchased sale of such shares Securities Transaction Tax is not levied. Investments in Listed equity shares: The equity shares which are listed with a recognized stock exchange are the listed equity shares. On sale or purchase of such shares, the Indian Government collects the STT at a fixed rate.
How do prices of the equity shares move?
Stocks are volatile instruments as their prices change every day. Numerous factors are responsible for the behavior of stock prices. So when the demand for stocks is more then than those who want to sell the stocks will raise the prices. This has a converse relationship just like the equity shares, when the investors are selling the stocks the prices of the stocks will fall. If the investors come across a positive review about to company regarding the growth, expansion/plans, projects approved by the government the price of the stocks rises. On the contrary, if there is any negative news about the company, you may also use the financial ratios to know the worth of the company.
Tax Planning Strategies with Equity Shares
- Holding Period Strategy: Holding shares for more than 12 months reduces tax liability as LTCG is lower than STCG.
- Tax Harvesting: Selling shares with gains up to ₹1 lakh annually can help avoid LTCG tax.
- Dividend Reinvestment: Instead of withdrawing dividends, reinvesting them in tax-efficient instruments can help grow wealth.
- Using Tax-Saving Mutual Funds (ELSS): ELSS funds, which invest in equities, provide deductions under Section 80C up to ₹1.5 lakh.
- Offsetting Gains with Losses: Losses from shares can be set off against gains to reduce taxable income.
Tax benefit in case of investment in shares
- Instead of opening a Demat account in the name of the person open the account in the name of all adult members in the family in the long term or short term as the gains will be distributed amongst the family members and the tax liability on one person will be decreased.
- If in case the equity shares are held for more than 12 months then the long-term capital gains to Rs.1,00,000 are fully exempt. And if the amount is exceeding Rs.1,00,000 then the tax will be collected at the rate of 10%.
- Suppose the equity shares are held for less than 12 months then the capital gains will be taxed at the rate of 15%.
- Before union budget 2018 the long-term capital gains on the sale of the equity shares were fully exempted but after 1ST of April 2018, the tax at the rate of 10% was levied such gains.
- The long-term capital loss that has been incurred during a financial year can be set off against the long-term capital gains for the particular financial year.
- It is better to open a Demat account in the name of the HUF. The Income Tax Act,1961 considers HUFs as a separate legal entity. The assessment of the HUFs is done separately. The basic exemption limit is 2,50,000. You can also form a Demat account in the name of the HUF.
- W.E.F from 1st April 2020 the dividend that is declared by the company is taxable in the hands of the shareholders. Section 194 states that the company will deduct a TDS of 10% if the dividend is exceeding Rs.5000. This TDS can be claimed against the tax liability at the time of filing the income tax return.
- For the long-term capital gains or the short-term capital gains, you will not be liable to get the deductions u/s 80C TO 80U.
| Age limit | Basic Exemption Limit |
| 80 years and above | 5,00,000 |
| 60 years and above | 3,00,000 |
| 60 years and above HUF | 2,50,000 |
FAQs
What are equity shares?
Equity shares represent ownership in a company, giving shareholders voting rights and a share in profits through dividends.
What expenses occur while trading in the Stock Market?
For undertaking transaction in a recognized stock exchange the following expenses need to occur: Brokerage, Securities Transaction Tax, Stamp duty, Stock exchange charges, Depository participant charges, SEBI turnover charges, GST.