Equity investments are an important part of any investor's portfolio. There are many different types of equity-related products on the market. Equities offer you the opportunity to build a diversified portfolio in addition to high returns. Invariably, you should begin investing in equities after conducting research and learning the fundamentals of stock markets. Equities' long-term returns will outperform inflation. This is because many companies invest in assets with money borrowed from investors and creditors. As a result, their businesses can earn higher profits. They do, however, differ in terms of features, exposure, risks, and tax rules. When an investor purchases an equity share in a company, he contributes to the company's total capital and becomes a shareholder. Such a contribution is treated by the company as a liability that must be repaid to the shareholders. Dividends and capital appreciation are the two ways that equity investors make money.
Why should you invest in Equity?
Long-term equity returns have historically outperformed cash and fixed-income investments such as bonds. Stock prices, on the other hand, tend to rise and fall over time. Because stock market fluctuations tend to smooth out over longer periods, investors may want to consider a long-term perspective for their equity portfolio. You can also build a diversified stock portfolio by purchasing small-cap, mid-cap, and large-cap stocks. None of the other three investment options allows you to diversify your portfolio by investing a small amount of money. In a nutshell, you can invest a small amount of money in the stock market and watch your wealth grow.
Securities Transaction Tax (STT)
The STT, which was introduced in 2004, is a type of direct tax levied on the purchase or sale of every security listed on the stock market. In other words, the investor is responsible for paying this tax at the time of each transaction.
Capital Gain Tax
A capital gain is any profit or gains derived from the sale of a "capital asset." Since this gain or profit falls under the category of "income," you will be required to pay tax on it in the year in which the capital asset is transferred.
Based on the holding period, capital gains are taxed differently:
Short Term Capital Gains
Any gains arising from the sale of shares within one year of their purchase are considered short-term capital gains under section 111A. Profits earned from the sale of STT (Securities Transaction Tax) paid shares that are traded on a recognized stock exchange are taxed at a rate of 15%. When shares are sold at a higher price than when they were purchased, the seller makes a short-term capital gain. Short-term capital gains arising from the sale of non-STT paid shares, bonds, debentures, and other listed securities, on the other hand, will be taxed at the individual income tax rates.
Long term capital gain on sale of equity
Any gains arising from the sale of (unlisted)shares within three years of the date of purchase are considered long-term capital gains under section 10 (38). Profits earned from the sale of STT (Securities Transaction Tax) paid shares listed on a recognized stock exchange are tax-exempt under section 10 (38) of the Income Tax Act, implying that no tax will be levied on such long-term capital gains. For equities listed on a recognized stock exchange such as the BSE or NSE, any gains on shares held for more than 12 months are considered long-term gains. Long-term capital gains are also currently tax-free. Long-term capital gains on non-STT paid shares, bonds, debentures, and other listed securities, on the other hand, will be taxed at a rate of 10%. However, gains exceeding Rs 1 lakh per financial year are subject to a 10% LTCG tax. To put it another way, LTCG of up to Rs 1 lakh is tax-free.
Loss from Equity Shares
Short-term capital loss
Any short-term capital loss from the sale of stock can be offset against any short- or long-term capital gain from any capital asset.
Long-term capital loss
After amending the law to tax gains over Rs 1 lakh at 10%, the government has also announced that any losses arising from listed equity shares, will be allowed to be carried forward.