Tax Benefits From Equity Investment

5paisa Research Team Date: 09 Jan, 2024 04:19 PM IST


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Engaging in investments is a wise strategy for portfolio diversification and wealth enhancement. Opting for equity investments not only aids in wealth accumulation but also brings forth advantageous tax benefits. Equity is a prime example of a tax-friendly option among various investment avenues. Recognizing how to optimize these tax advantages becomes crucial for substantial tax savings. So, let's explore the benefits of investing in equity funds and provide valuable tips to assist you in maximizing these advantages effectively.

What are the Benefits of Investing in Equity?

There are numerous benefits of investing in equity: -   

1. 0% DDT, Higher Dividend

In the past, domestic corporations and mutual fund companies deducted 15 percent (plus applicable surcharges or CESS) as Dividend Distribution Tax (DDT) before disbursing dividends to investors. However, a change occurred in FY20-21. A dividend represents a portion of a company's profit distributed to investors annually or semi-annually, serving as a secondary income source. 

Notably, removing DDT now allows investors to receive higher dividend rates. This alteration signifies a positive shift, enabling investors to enhance their income through dividends without the previous tax deduction.

2. No Worries About Long-Term Gain

Dividends are a lucrative perk for potential shareholders, offering an additional income stream from their investments. Another avenue of income linked to equity share investments emerges when you sell your shares at a higher price to another shareholder, resulting in capital gains. For equity shareholders, capital gains play a significant role in their investment journey. If you retain your investment for a year or more, it qualifies as a long-term capital gain, exempt from taxation. Conversely, selling shares within 6 months incurs short-term capital gain taxes.    

3. Completely tax-free

Curious about how shares qualify as completely tax-free investments? Let's break it down: Imagine you own shares in a company like XYZ, and this company decides to distribute a small portion of its profits to shareholders, known as dividends. Many companies regularly pay out dividends, offering shareholders a consistent income stream. 

The noteworthy aspect is that the income generated through dividends is entirely tax-free. In simpler terms, you're not obligated to pay taxes on this form of income. Just declare the details in Form 16 under the relevant section. Opting for equity shares as an investment thus places you in a favorable position compared to other taxable investment options.   

4. The option to set off capital gains

Another benefits of investing in equity associated with equity investment lies in the flexibility to set off capital gains. If you've incurred short-term capital gains from selling shares within 6 months, you can offset these gains against short-term capital losses from other investments. For instance, if losses occurred in various forms of investments, you have the option to balance the capital gains from equity sales against these losses. This strategic approach allows for potential tax savings, providing a valuable mechanism to optimize overall tax liabilities.  

5. Utilize the carry-forward option to save your taxes.

Capital gains resulting from the selling of shares offer the advantage of being carried forward to the subsequent year. When faced with capital losses due to a distressed sale of shares, these losses can be offset against the capital gains from profitable share sales. This offsetting mechanism remains applicable for up to 8 consecutive years. It's crucial to ensure that capital gains and losses pertain to the same investment class. Essentially, if you've gained from share sales, you can utilize those profits to counterbalance losses stemming from additional share sales. This dual strategy not only minimizes taxes but also optimizes the benefits of simultaneous loss or gain offsets and carry-forward options.

Get Extra Tax Benefits by Investing Your Money With Equity Linked Saving Scheme

• Equity Linked Saving Schemes (ELSS) offer a dual advantage, providing various tax benefits.
• Investment in ELSS qualifies for tax savings under section 80C.
• Investors can save taxes from various income sources, including salaries, business, or real estate.
• ELSS investments under section 80C allow tax savings of up to Rs 1.5 lakhs annually.
• Investing in ELSS can result in tax savings of up to Rs 46,000 per year.
• A three-year lock-in period.
• Deduction under section 80C for amounts up to Rs 1.5 lakhs.
• Long-term capital gain tax reduction benefits.
• Dividends received exempt from Dividend Distribution Tax (DDT) starting from FY20-21.

Rajiv Gandhi Equity Savings Scheme

For those entering the stock or equity market, the Rajiv Gandhi Equity Saving Scheme proves to be a more favorable option. By opting for this scheme, investors can enjoy significant tax benefits, potentially up to Rs. 50,000. This option becomes particularly attractive for individuals new to the dynamics of the stock market, offering a beneficial avenue for investment with added tax advantages.

Who Should Invest in Equity?

Making wise financial decisions involves recognizing that putting your entire investment corpus into equities may not be prudent. Age, risk tolerance, return expectations, and investment duration are pivotal factors influencing the appropriate equity allocation. So, to mitigate risks, diversification across various asset classes, shares, and equity funds is crucial. Seeking guidance solely from qualified financial advisors is advisable, ensuring well-informed investment decisions aligned with individual financial goals and circumstances.

Things to Know Before Investing in Equity

If you are planning to invest in equity funds, you must consider some of the important factors to get most of the benefits of equity investment which will help you make the right decision. They are: -
• Total size of the funds you want to invest
• Types of equity funds you choose from
• Risk reward ratio.
• Expense ratio
• Benefits of tax
• Taxation of equity funds you has selected
• Dividends
• Think about your financial goals

How to Start Your Equity Investment?

To move into the stock market, there are numerous paths that you can explore. One option is opening a demat account with any reputed brokerage firm, granting direct access to stock market investments. Alternatively, seeking guidance from a financial advisor is another best option, where they provide recommendations and execute the fund purchases on your behalf. 

Another route is directly acquiring equity funds from a fund house. Regardless of the chosen method, initiating any investment necessitates the completion of KYC (Know Your Customer) verification, ensuring compliance with regulatory requirements and establishing the investor's identity.


Embarking on equity investment yields long-term advantages and presents notable benefits of investing in equity. However, it's imperative to comprehend the intricacies and conditions associated with these tax advantages. Employing intelligent investment tactics such as prolonged holding, tax loss harvesting, and prioritizing retirement savings can effectively diminish your tax obligations and fine-tune your portfolio for consistent income generation. By incorporating these strategies, you can harness the tax benefits inherent in equity investments, enabling you to retain more of your earnings and foster the growth of your wealth.

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