Taxation

A Brief Understanding on Investment in Equity Shares & Tax planning

Earlier majority of the people used to invest in FDs, bonds etc., to make some additional income however, with time, this trend has seen a definite shift with people now increasingly making investment in equity shares and equity oriented funds. Considering the ease with which Demat account can be opened, people are investing their capital in the share market.

Meaning of Equity Shares

When a company is formed, its capital is divided into small parts, and each such part is called Share, and the total capital is called Equity Share Capital. The investors investing in such shares are called Equity Share holders. They are also considered as the owners of the company. They get the dividend based on the profits of the company.

In case of Public Companies, if the shares are listed, then the share market price also increases. Hence the wealth of the shareholder also increases, but if the company incurs loss, then shareholders don’t get dividend, and the market price of the share also gets affected. If the company shuts down its operations, then the maximum loss is borne by the equity share holders.

Understanding Investment in Equity Shares

Investment in Unlisted Equity Shares

Those equity shares not listed in a stock exchange are called unlisted equity shares. When the purchase or sale of such shares is made, Securities Transaction Tax is not levied.

Investment in Listed Equity Shares

Equity Shares listed in any stock exchange is called listed equity shares.  When the purchase or sale of such shares is made, Securities Transaction Tax is collected at a fixed rate.

Investing in Equity Shares

If a company functioning on a small scale wishes to expand its business and which involves big scale of funding, then the company collects the capital from public as the promoters have limited capital.

When the company offers the shares to public at a fixed price for the first time, it is called Initial Public Offer, and it is also considered as Primary Market as the shareholders can acquire the shares directly from the company itself and make investment. When the company allots shares to shareholders, then such shares gets listed in stock exchange.

Then the shareholders would be able to purchase or sell transactions of such listed shares on the stock exchange. It may be noted that the Securities and Exchange Board of India regulates the Stock Exchange in India^[1].

Investment in Equity Shares vs. Investment in Equity Funds

In case you invest in shares, you should be aware of different complexities as well. Investment in stocks is a dynamic process as the business prospects undergo changes due to competition. Moreover you would need higher initial capital to create a well-diversified portfolio.

In case of equity funds, it may be a more easy way as the fund manager takes care of your portfolio.

Essential requirements for investing in the share market

Some of the essential requirements for investing in the share market are as follows:

• PAN Card;
• Demat Account where the shareholders can hold shares in their name;
• Trading account which is mandatory to make investment in the stock market;
• Bank account to make payments or obtain payments for purchasing/selling shares.

Expenses for undertaking transactions in Share Market

The following expenses have to be incurred in order to undertake sale/purchase transactions in a recognised stock exchange:

• Brokerage;
• Stamp Duty;
• Securities Transaction Tax;
• Stock Exchange Charges;
• SEBI Turnover charge;
• Depositary Participant charge.

Payment of Income Tax on profits from sale of shares

There are numerous people who are unaware of the tax liability on the sale of shares hence they end up paying taxes with interests and penalties. You should be aware of this fact that the details of the sale/purchase transactions in share market is accessible to the IT Department, considering your Demat/trading/ bank account is linked to your PAN and Aadhaar. Therefore you cannot run away from your income tax liability in this regard.

Investment in Equity Shares: Essential points to know

• Firstly you need to know if you are a Trader or an investor in the share market. If you desire to make profits by holding shares for an extended period of time as an investment then you fall under the bracket of an Investor, whereas in case you desire to earn profits by sale/purchase transactions of equity shares by taking delivery, Intra-day etc. then you are considered as a Trader in the share market.
• There are various stock broking firms that provide you with the statement showing loss/profits incurred by you in the share market. Therefore you can determine your tax liability based on that.
• Tax planning is a critical factor which should be considered before you make an investment as it will help you in reducing your tax liability.
• Pay the advance tax on profits made during the year.
• File ITR before the deadline prescribed by the Income Tax Department/Government.

Conclusion

Investment in equity shares can be beneficial considering the fact that it assists in beating the inflationary pressure by delivering high rate of return as compared to other havens. However, you should take into account other complexities before making investment.

Read our Article: Income Tax & FEMA Implications on Transfer of Equity Shares