Equity Shares And Tax Planning

Traditionally people used to invest in FDs, Post offices, Bonds, etc but due to the increasing inflation and decreased interest rates people are now turning towards Equity shares and Equity Oriented funds. According to the SEBI data around 1.42 crores of new Demat accounts have been opened in the year 2021. The majority of the Indians prefer investment in the Share market in IPOs.Investing in equity shares will help in beating inflationary pressure by delivering as they give higher returns. But before investing they should consider the complexities.

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.

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.

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.

How are equity shares taxed?

When you invest in shares the capital gains on the sale of the shares are taxable. Capital gains are obtained after subtracting the selling price from the purchase price of the equity shares. The rate of taxation on capital gains is dependant on how long you have invested in stocks. When you sell equity within one year from the purchase date you earn short-term capital gains. These are taxed at 15%. If you sell a listed equity share after one year then you earn long-term capital gains. The Long term capital gains are taxed at the rate of 10% sans indexation.

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

To file your income tax returns visit www.indiafilings.com or talk to our experts today.

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Frequently Asked Questions

Common questions about Equity Shares and Tax Planning in India.

Equity shares represent small units of ownership in a company. When an investor buys equity shares, they become a shareholder and contribute to the company's capital. Equity shareholders earn returns through dividends and capital appreciation, and also have voting rights in the company.

You can invest in equity shares in two ways - unlisted equity shares, which are not listed on a stock exchange, or listed equity shares, which are traded on recognized stock exchanges like BSE and NSE. For listed shares, you need to pay Securities Transaction Tax (STT) on buying and selling.

Equity share prices are volatile and can fluctuate daily based on factors like demand and supply, company performance and growth prospects, government policies, and overall market sentiments. Positive news about a company can drive up its share price, while negative news can cause the price to fall.

When trading equity shares on a recognized stock exchange, you need to pay brokerage fees, Securities Transaction Tax (STT), stamp duty, stock exchange charges, depository participant charges, SEBI turnover charges, and GST.

Capital gains from selling equity shares are taxed based on the holding period. Short-term capital gains (shares held for less than a year) are taxed at 15%, while long-term capital gains (shares held for more than a year) are taxed at 10% without indexation.

If you hold equity shares for more than a year, long-term capital gains up to Rs. 1 lakh are fully exempt from tax. You can also consider opening a Demat account in the name of adult family members or as a Hindu Undivided Family (HUF) to distribute the tax liability.

From April 1, 2020, dividends declared by companies are taxable in the hands of shareholders. The company will deduct a 10% TDS on dividends exceeding Rs. 5,000, which can be claimed as a tax credit when filing your income tax return.

No, you cannot claim deductions under Section 80C to 80U of the Income Tax Act for long-term or short-term capital gains from equity shares.

The basic exemption limit for taxation of income from equity investments depends on your age and residential status. For individuals below 60 years, it is Rs. 2.5 lakh, for senior citizens aged 60-80 years, it is Rs. 3 lakh, and for super senior citizens above 80 years, it is Rs. 5 lakh.

You can file your income tax returns for equity investment income online through platforms like www.indiafilings.com or by consulting tax experts. Be sure to accurately report your capital gains, dividends, and other income from equity investments.