Avail tax deductions & exemptions on stock investments

Investing in equity not only helps you diversify your portfolio but also fetches high returns in the long term. Investing in equity also offers various tax exemptions and deductions which you can avail of on your stock market investments.

Listed below is a comprehensive picture of the deductions and exemptions that you are entitled to in various stock instruments, whether you invest directly or indirectly.

Investing Directly in Equity

• Stocks
• No lock-in period.
• Long-term capital gains (investments held for up to 12 months) are tax-free.
• Short-term capital gains (investments held for less than 12 months) are taxed at 15% + 3% cess.
• Any capital loss after the offset can be carried forward up to eight financial years.
• Short-term capital gains can be offset against short-term losses.
• Short-term capital loss can be offset against any capital gain—long term or short term.
• Long-term capital loss can be offset only against a long-term capital gain.
• Both long-term and short-term capital losses can’t be offset against income from any other source.
• Dividends are tax-free but bonus shares are taxed if sold within a year.

Rajiv Gandhi Equity Savings Scheme

• The Scheme has a lock-in period of three years.
• Available only to first-time investors who have an income of less than Rs. 12 lakh a year.
• Provides tax benefit to first-time stock investors under Section 80 CCG. This deduction is over and above the Rs. 1 lakh limit under Section 80C.
• Deduction of 50% of investment up to Rs. 50,000 in specified shares.
• In the first year, investors can sell shares. After this period, shares can be sold but proceeds are to be reinvested using the share trading app and Website.
• Long-term capital gains are tax-free.

Investing Indirectly In Equity

Mutual funds: Equity & balanced

• No lock-in period.
• Long-term capital gains are tax-free.
• Short-term capital gains are taxed at 15% + 3% cess.
• Short-term capital gains can be offset against short-term losses.
• Short-term capital losses can be carried forward for up to eight years.
• Dividends received are tax-free.

Equity linked savings scheme

• A lock-in period of three years.
• An investment of up to Rs. 1 lakh gets deduction under Section 80C.
• Long-term capital gains are tax-free.
• Dividends received are tax-free.

Insurance

Unit linked insurance policies

• A lock-in period of five years.
• A premium of up to Rs. 1 lakh gets deduction under Section 80C if life cover is 10 times the annual premium.
• No tax incidence while switching from one fund option to another.
• Partial withdrawals are tax-free.
• Maturity amount is tax-free if life cover is 10 times the annual premium.

Unit linked pension plans

• ULPPs come with a lock-in period of five years.
• Premium of up to Rs 1 lakh gets deduction under Section 80C.
• No tax incidence while switching from one fund option to another.
• At vesting age, one-third of the corpus, which the customer can take as lump sum, is tax free.
• The remaining amount has to be invested in annuity. At present, the annuity income / pension is taxable.
• However if Direct Taxes Code is implemented, the annuity products would be brought under the EEE (exempt, exempt, exempt) category.

National Pension System

• The lock-in period is till the age of 60.
• An investment of up to Rs. 1 lakh gets deduction under Section 80C.
• An investment of up to 10% of the basic salary is eligible for further deduction under Section 80CCD(2).
• No tax incidence while switching from one fund option to another or from one fund manager to another.
• No tax on 60% of the corpus withdrawn on maturity. The remaining amount has to be invested in annuity. At present, the annuity income / pension is taxable.
• However if Direct Taxes Code is implemented, the annuity products would be brought under the EEE (exempt, exempt, exempt) category.