Equity investment and its effect on income tax
The investment domain is generally divided into two portions; long-term and short-term investment. Both the terms are self-explanatory by the fact that they are distinguished by the extent of time by which the investment is done. Long-term investment entails that the amount put into the business acts as a capital investment and does not return in the due course of business but allows the investor to hold a stake in the company i.e. equity.
Equity investment is one of the measures of generating long revenue and has the ability to provide the investor a relatively safely kept investment in the duly dynamic economic stratum. This is based on the fact that over the longer tenures of time, the value of money and stake do not deteriorate but usually end up generating positive returns.
The income tax calculations too are in favor of equity investment as the system has been devised in a way that it takes into account the money that sits virtually idle in the form of the equity. This allows the investor to avail of certain tax benefits by the money invested in equity. Let us take a look at these benefits attached with equity investment.
- Dividends: The Company in whose equity the investor owns the shares releases its profits and distributes it amongst the shareholders on the basis of the amount of equity held. This distributed amount is called dividend. The dividends earned off the domestic companies are totally tax-free in the bracket of 10-15 %. For the individuals in 25-35%, the tax is calculated at the rate 15 % while exceeding this income group the person is liable to pay tax at the rate of 20 %.
- Capital gains: There are transactions amongst fellow share investors as well. When another person buys your share by paying a higher price than the regular market price, then this gain is called as capital gain in the economic terms. The government of India protects this amount gained by the investor from income tax, giving the share investor some extra earnings. The taxation for this is done at the rate of 15 %.
- Capital loss: There are provisions that if an equity investor loses some money in the form of capital loss than this loss can be carried forward to utmost 8 years. This amount is shown in the form of debts and therefore reduces the payable taxes.
- ELSS: Section 80 C of the Income Tax Act allows a citizen to invest in the Equity Linked Savings Scheme. The amount invested in these schemes can be even from the other sources of income. This amount can border to Rs 1.5 lakhs in a financial year. It can be used to get tax deductions over the income earned.
- Set off capital gains: The investor can set off capital gains i.e. the short term capital gains can be set off instead of any short-term capital loss by the investor. This allows the taxable income to go further down, and hence the investor saves money in the form of income tax deductions.
Equity investment is usually meant for the monetary gains on the longer side of the timeline, but the additional tax benefits that come enclosed with this make the deal all the more lucrative. It allows the investor to get some tax-free income as well as helps in reducing the taxes on the other income sources by the present taxation modules.