As the end of the fiscal year approaches, you're undoubtedly considering tax-saving options. With the market surge generating profits, you might wonder how to minimize taxes on these gains and retain as much of your earnings as possible. While taxes cannot be avoided, you can use these tactics to lower your capital gains tax burden.
What is Capital Gain?
First, let's understand capital gains and its two types: short-term capital gains (STCG) and long-term capital gains (LTCG). Income from capital gains refers to any profit or gain realized from the sale of a capital asset. These gains are taxed in the year the asset is transferred, known as capital gains tax.
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Short-Term Capital Gains (STCG): When you sell stocks within 12 months after purchasing them, the difference between the sale price and the purchase price is termed short-term capital gains.
Long-Term Capital Gains (LTCG): When you sell securities after holding them for more than 12 months, the difference between the sale value and the purchase price is termed long-term capital gains.
Long-term capital gains (LTCG) from stocks or equity-oriented mutual funds were exempt from taxation until March 2018. Since the 2018 budget, LTCG is tax-free up to Rs 1 lakh; any amount above that is subject to a 10% tax.
Three Effective Strategies to Save Tax on Stock Market Profits
1. Tax Loss Harvesting
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When you sell a stock for a profit, it is considered as realized gains and is thus taxed. If you incur a loss on selling stock, you can use the amount to offset your realized gains, a strategy known as tax-loss harvesting. This reduces your tax liability. By balancing gains with losses, you effectively decrease the taxable amount, resulting in a reduced tax bill.
2. Extend Investment Duration for Long-Term Gains
Another smart way for stock market traders to save tax is to extend your investment horizon to qualify for long-term capital gains tax rates. By holding investments for at least a year, any profits from selling these investments qualify for lower long-term capital gains tax rates. This strategy helps save on taxes compared to short-term gains, which are taxed at higher rates.
3. ELSS Tax-Saving Investment
Under Section 80C of the Income Tax Act of 1961, an Equity Linked Savings Scheme (ELSS) is an investment that can save taxes. Investing in ELSS allows investors to receive a tax rebate of up to Rs 1,50,000 each year, potentially saving up to Rs 46,800 in taxes. ELSS mutual funds invest largely in stocks, providing the opportunity for both financial appreciation and tax savings. These funds have a three-year lock-in period, enabling consistent wealth creation via SIPs.
