When investors sell stocks and realise profits, these gains attract taxes. While taxes cannot be avoided, investors can certainly reduce their tax liability by properly claiming deductions under the Income Tax Act. Many investors focus solely on buying and selling stocks to maximise returns but often overlook tax planning — eventually paying a significant amount in taxes. Understanding how to save tax on stock market profits can help reduce the overall tax burden for a given assessment year.
In this article, we will explore capital gains tax in India and how investors can minimise taxes on stock market profits.
Capital Gains Tax in India
Any profits or gains earned from the sale of capital assets — such as stocks, mutual funds, bonds, and ETFs — are subject to taxation under ‘Income from Capital Gains’. These gains are taxable in the year in which the asset is transferred or sold. Based on the holding period, capital gains are categorised into two types:
Short-Term Capital Gains (STCG): Gains from assets held for less than 12 months.
Long-Term Capital Gains (LTCG): Gains from assets held for more than 12 months.
In India, profits earned from selling listed shares, equity mutual funds, or ETFs are taxed at a flat 20% if sold within 12 months, with no exemption allowed, while LTCG is taxed at 12.5% after an exemption limit of Rs 1.25 lakh.
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How to Save Tax on Stock Market Profits?
Realising Losses to Offset Gains
Selling underperforming stocks or equity mutual funds at a loss is an effective way to reduce tax liability. This strategy, known as tax-loss harvesting, allows investors to offset capital gains with realised losses, ultimately lowering the taxable amount.
Filing Losses to Reduce Capital Gains
It’s not just about realising a loss in a particular year — filing the loss is equally important, even if there is no taxable income in that year. Investors can carry forward both Short-Term Capital Losses (STCL) and Long-Term Capital Losses (LTCL) for up to eight assessment years, allowing them to offset future gains and reduce tax liability over time.
Buying Residential Property to Reduce Tax Burden
Investors can lower their tax liability by purchasing a house using capital gains from stocks or mutual funds held for more than 12 months. Under Section 54F of the Income Tax Act, long-term capital gains are exempt if they are reinvested in a new residential property within one year before the sale of the capital asset, or two years after the sale of the asset.
Additionally, if an investor is constructing a house, they can reinvest capital gains multiple times (for a second or third time) towards the same under-construction property to claim tax benefits.
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Gifting long-term equity shares (held for more than 12 months) to relatives is a tax-free strategy for the sender. The recipient is only taxed when they decide to sell the shares. If the sender were to sell the shares and transfer the money as a gift, the gains would be taxed as LTCG in their hands.
Additionally, if the recipient later sells the shares and reinvests the profits in a residential property, they can claim a deduction under Section 54F, provided they do not own more than one house property (excluding the new purchase) at the time of sale.
Using the Exemption Limit of Rs 1.25 Lakh Efficiently
To reduce tax liability, investors should strategically book profits up to the Rs 1.25 lakh exemption limit each year or combine gains with losses to ensure net taxable gains remain within the limit.
Increasing the Holding Period
Extending the holding period beyond 12 months can significantly lower tax rates. While STCG is taxed at a flat 20% with no exemption, LTCG is taxed at 12.5% after the Rs 1.25 lakh exemption. Holding investments for the long term not only enhances tax efficiency but also allows for compounding benefits.
Capital Gains Deposit Account Scheme (CGAS)
If an individual cannot reinvest capital gains in a residential property before the income tax return filing deadline, they can deposit the unutilised amount in a Capital Gains Deposit Account Scheme (CGAS) with a public sector bank. The deposited funds must be used within two years for purchasing a house, or three years for constructing a house.
This helps ensure that the exemption under Sections 54 and 54F remains valid, even if immediate reinvestment is not possible.
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Wrapping Up
Tax planning is just as important as investment planning. By adopting strategies like tax-loss harvesting, carrying forward losses, reinvesting in residential property, and utilising exemption limits efficiently, investors can significantly reduce their capital gains tax liability. Additionally, holding investments for the long term enhances tax efficiency while enabling higher returns.
*This article is for informational purposes only. This is not investment advice.
*Disclaimer: Teji Mandi Disclaimer
