Can We Save Taxes by Investment in Equity

WHY FIXED INCOME?

The most common and accepted form of investment is Gold & fixed deposits. Nevertheless there has been a recent shift in paradigm or investor mindset for investment in other modes also. The interest or gains which they earned gets added into their income and thus they end up paying marginal rate of income tax. For example a person, who earns income falling under tax bracket of 30%, gets Rs. 1,00,000 interest income on his fixed deposits at the interest rate of 9% then he has to pay 30.9% tax on the interest income and finally gets Rs. 69,100 in hand. It means you get just 6.2% return in hand after tax. So, there is the need to understand other investment options & their taxation.

An alternative to fixed deposits with minimum risk  is Debt funds. However while investing in these funds one needs to keep in mind the taxation aspects. If one invests for less than 36 months then the taxation is similar to the taxation on fixed deposits, but if one invests for more than 36 months then he will have to pay 20% tax after indexation. For example if a person earns 9% annualized return and inflation rate is 6% which means he/she earns 3% after inflation and will have to pay 20% on it which will be just 0.6%. So one will be able to get 8.4% return in hand after tax irrespective of your tax slab.

 

WHY EQUITY?

In terms of returns the best advisable option to invest is the equities. One can buy stocks directly from the market or through equity mutual funds. Equity markets may be risky for short tenure, but in long run they provide highest returns in comparison to other asset class provided one has to invest wisely. Also the taxation in equities is low. If one invests for less than 12 months then it will be considered as short term capital gains & he will have to pay 15.45% tax on capital gain. If one invests for more than 12 months then gain will be considered as long term capital gain and it will be totally exempted from tax.

 

DEBT AND EQUITY RETURNS

Another option could be the balanced funds where at least 60% is invested in equities and rest in debt. It is safer than equities but riskier than debt. In long run balanced funds have provided annualized return of 14-15%. The taxation of balanced fund is same as in equities. So by investing in balanced fund you can save the tax even on the portion which has been invested in debt.

If you are a first-time equity investor and want to save tax, invest in equity-linked savings schemes (ELSS) with equities first. One may also consider investing under the Rajiv Gandhi Equity Savings Scheme(RGESS).

While fund houses are launching tax-saving investment schemes under the RGESS, which provides exemption to investors who have not invested in direct equity. But due to the limit of Rs 50,000 in RGESS and as it is open for those who have annual taxable income of up to Rs 12 lakh, the scheme is not available for all investors. The tax-exemption that is available for RGESS falls under Section 80 CCG. You can invest a maximum of Rs 50,000 in RGESS and you’ll be eligible for tax exemption on 50 per cent of that amount. So, assuming you invest Rs 50,000, you will get the exemption benefit on Rs 25,000. This means that if you are in the 30 per cent tax bracket, you will get an exemption of Rs 7,500.

If you are looking for equity investments, ELSS is a better option as your investment gets a tax deduction (up to Rs 1.5 lakh) under Section 80 C. This includes all other investments such as EPF,PPF and re-payment of the principal of a home loan, etc. However, if you haven’t covered this investment limit entirely and are looking to save taxes with equity investments, then it may be a better idea to invest in ELSS.

The lock-in period for RGESS is the same as that for ELSS, that is, three years. But ELSS funds have more flexibility and more scope for active management. Therefore, over a three-year period, returns from ELSS are likely to be better. However the whole process of investing in RGESS is cumbersome.

Conclusion

Salaried persons who roughly earn salary of more than Rs. 12 lacs per annum have their limit u/s 80C completely exhausted with investments in Provident Fund itself. But for those persons who have, however, not completely exhausted their investment limit may opt for investment in ELSS, and if still they have some surplus for investments, one may opt for investment in RGESS.

Source: https://www.hrblock.in