Investment in equity is an important part of an investor’s portfolio. There are many types of equity related products available in the market. However, they differ from one another in terms of features, exposure, risks and tax rules.
When an investor parks money in shares, they make capital gains on the sale of shares which are taxable. Capital gains are the difference between the selling price and purchase price of the equity share. These are based on the period of holding and whether it is listed or unlisted.
According to Ashok Shah, partner at NA Shah Associates, long term is defined as more than 1 year for listed stocks and equity-oriented mutual funds (EOMF), whereas for unlisted shares it is 24 months.
"In the case of listed equity shares or mutual funds which are held for more than one year, the gains are long-term in nature and get taxed at a tax rate of 10 percent. However, there is no tax for aggregate long-term gains up to Rs 1 lakh in a financial year," explains Archit Gupta, founder and chief executive officer, ClearTax.
The short-term gains for listed equity investments bought and sold within a year, meanwhile, get taxed at a rate of 15 percent.
"The benefit of indexation of cost price is not available for both short-term and long-term gains in case of listed equity investments," Gupta elaborates.
In case of unlisted shares, if the period of holding is up to 24 months, the short term capital gain is taxed at slab rates for residents.
“If the period of holding exceeds 24 months, then long term capital gain is taxed at 20 percent,” adds Shilpa Bhatia, director-taxes, AKM Global, a consulting firm states
For non-resident, according to Shah, it is taxable at 10 percent (without indexation and without foreign exchange fluctuation benefit). The short-term gains on unlisted equity shares get taxed as per the income slab rates of the taxpayer.
For residents, dividend is taxable at applicable rate whereas for non-resident, it is taxable at 20 percent.
Equity oriented mutual funds are taxed in the same way as listed equity shares.