Tax Saving Strategies: A Comprehensive Guide to Capital Gains/Losses on Stock Market Investments

Equity investments can be a great way to grow your wealth, but taxes can eat into your profits. Fortunately, there are several strategies you can use to reduce your tax liability and keep more of your hard-earned money. Here are some tips to help you save on taxes when investing in equities.

Your profits from equities and equities-oriented schemes are divided into short-term and long-term capital gains.

Short-term capital gain (STCG): Holding less than 12 months, tax @15%

Long-Term Capital Gain (LTCG)- Holding more than 12 months, tax @10% on gains exceeding more than ₹1 lakh in a financial year.

How to Reduce the Tax

LTCG

You pay the LTCG, if your gain exceeds 1 lakh.

Let's understand through an example

Assume you invested ₹5 lakhs in equity in March-2022

And after a year (12 months) your investment value is approx. ₹5.9 lakhs

If you sell your investment, your gains will be ₹90,000, and tax liability will be zero as your gains are below ₹1 lakh.

What Next???

Reinvest the entire amount and this time your investment capital will be ₹5.9 lakhs and for taxation purchase, this would be your purchase cost.

In such a scenario:

If the value of the investment increases to 6.9 lakhs next year and you book a profit 1Lakh will be considered as your profit because your cost of investment will be considered as 5.9 Lakhs. And if income tax rules remain unchanged then 1 lakh will be exempt. However, if you would not realize profits your tax would have been 6.9 lakhs – 5 lakhs = 1.9 Lakhs – 1 lakh exempt= 90000 10% = 9000.

Without tax harvesting, your tax liability will keep rising with capital appreciation.

In case your LTCG is more than 1 lakhs and if you have Short-term capital loss (STCL)/ Long-term capital loss (LTCL) you can book STCL/LTCL. And after offsetting it LTCG up to 1 lakh is exempt.

STCG

You pay the STCG, from 1st rupees. However, most investors will have both STCG and STCL. And usually, investors tend to book profits but keep losses unrealized. But if they booked STCG and have unrealized STCL then they should book it as both will be squared off and ultimately there will be no tax. (Refer Example 2 below)

Tax Harvesting on losses

If you sell your investment at loss, you can offset these losses from the profit and carry forward these losses for up to 8 years if you fail to offset in any particular year.

Example:

1. You booked an LTCG profit of ₹2.5 lakhs.

   You pay a tax of 10% over one lakh= ₹15,000

   What you get post-tax = ₹235,000

   Now if you book a loss of 50,000 (STCL/LTCL)

   You pay a tax of = ₹10,000

   What you get post-tax = ₹245,000

2. You booked STCG = 1 Lakh

   Assuming you have unrealized STCL of 1 Lakh book them too.

   Net STCG = 0.

This way, you can reduce the tax payable and enjoy higher profits!

Important notes: -

1. LTCL can only be offset with only LTCG.

2. However, if you have a short-term capital loss you can use them to offset short-term and long-term capital gains for up to 8 years.

Other important things to do before 31st March

Before the financial year-end, it's important to link your Aadhar and PAN, file for nominees in Demat and mutual fund holdings, and make tax-saving investments like PPF, ELSS, and NPS. Additionally, make sure to pay any remaining advance tax by the deadline of 15th March to avoid penalties.

By using these tax-saving strategies, you can maximize your equity investments and keep more of your profits.