Incomes from equity investments – ascertain their income-tax impact

Equity investments are characterised by high risk and high return. Statistics have however shown that the effects of risk in stock prices reduce over a long period of time, e.g. five years and above. Due to their high return feature, equity investments form part of most investor’s portfolios.

There are different types of equity products available for investing, e.g., equity-oriented mutual funds, unit-linked insurance plans, listed equity shares etc. Each of these products differ in terms of their features, exposure to investment risk and the end purpose. An investment in a listed equity share carries more risk than an equity oriented mutual fund, ULIP has an additional feature of providing insurance etc.

The taxation of the equity investments mentioned above is based on their features and the purpose they serve. Taxes on their returns form part of the cost for a taxpayer. A taxpayer should take into account the estimated taxes before opting for an equity investment. A brief summary of the tax impact of various equity investments is provided below:

Note:

1) Equity-oriented mutual funds are those that invest at least 65% of their corpus in equity instruments.

2) Long term capital gains over Rs. 1 Lakh are taxed in case of listed equity shares and equity oriented mutual funds.

3) A dividend distribution tax of 20.56% is paid by companies distributing dividend.

4) Dividends distributed of 11.648% is paid by equity-oriented mutual funds distributing dividend.