Equity Shares and Tax Planning

Traditionally, people used to invest in Fixed Deposits (FDs), post offices, bonds, etc., but with rising inflation and decreasing interest rates, there is a growing shift towards equity shares and equity-oriented funds. According to SEBI data, around 1.42 crore new Demat accounts were opened in 2021, indicating a significant interest in stock market investments, especially Initial Public Offerings (IPOs). Investing in equity shares helps counter inflationary pressures by offering higher returns, but investors must consider the complexities involved.

What Are Equity Shares?

Equity shares represent small units of ownership in a company where the total business is divided. Investors who subscribe to equity shares contribute to the company's capital and become shareholders, entitled to returns in the form of dividends and capital appreciation. Additionally, equity investors gain voting rights in the company. While shareholders are considered part-owners, their control is limited.

Companies issue shares primarily to raise funds for growth and expansion. During an Initial Public Offering (IPO), shares are available to the general public for the first time. Once listed on the stock exchange, they are frequently traded. After subscribing to shares, records are maintained at depositories like NSDL and CSDL. In case of dividend or bonus share distribution, the company gets the shareholder list from these depositories and credits dividends directly to the bank accounts.

How to Invest in Equity Shares?

Investors can invest in equity shares in two main ways:

Unlisted Equity Shares: These shares are not listed on any recognized stock exchange. When sold, Securities Transaction Tax (STT) is not levied.
Listed Equity Shares: These shares are listed on recognized stock exchanges, and the Indian Government collects STT on their sale or purchase at a fixed rate. For more details on equity investment documents, visit this guide.

How Do Prices of Equity Shares Move?

Stock prices are volatile, changing daily based on various factors. When demand for stocks increases, sellers might raise prices. Conversely, when stocks are widely sold, prices tend to fall. Positive news about a company, such as growth plans or government project approvals, can drive prices up. Negative news or poor financial ratios typically cause prices to drop. Discover more about preference shares in the context of equity shares in this comparison.

What Expenses Occur While Trading in the Stock Market?

Investing in the stock market involves these expenses:

Brokerage
Securities Transaction Tax
Stamp duty
Stock exchange charges
Depository participant charges
SEBI turnover charges
GST

How Are Equity Shares Taxed?

The capital gains from selling equity shares are taxable. Capital gains are calculated by subtracting the purchase price from the selling price of the shares. The tax rate on capital gains depends on the holding duration. Short-term capital gains, or shares sold within a year, are taxed at 15%. Long-term capital gains, or shares sold after a year, are taxed at 10% without indexation. Understand more about tax planning in the context of dividend income here.

Tax Benefits of Investing in Shares

Opening multiple Demat accounts in the family's name can distribute gains and reduce individual tax liability.
Long-term capital gains up to ₹1,00,000 are exempt. For amounts over ₹1,00,000, a 10% tax is levied. Pre-2018 sales were exempt, but post-April 2018, a 10% tax applies.
Short-term capital gains are taxed at 15%.
Long-term capital losses can be offset against gains within the same financial year.
Opening a Demat account under a Hindu Undivided Family (HUF) can be beneficial as HUFs have separate assessment with a basic exemption limit of ₹2,50,000.
From 1st April 2020, dividends are taxable in shareholders' hands. If dividends exceed ₹5,000, a 10% TDS is deducted and can be claimed during tax returns. For more on tax planning strategies, visit this resource.
No deductions under sections 80C to 80U for capital gains.

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 explore last-minute tax planning options or learn about setting up a new business with tax considerations, visit our guide or business setup resources.

To file your income tax returns, visit IndiaFilings or speak with our experts today.

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Frequently Asked Questions

Common questions about Equity Shares Tax Planning.

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.