Income Tax: Know how much you pay on returns from equities, mutual funds

No matter how much you invest in equities, it is important to know how much tax you are liable to pay, as it reduces your overall income. There are different types of taxes you pay on equity instruments. Whether you invest directly into stocks or invest through mutual funds, you have to pay some form of taxes.

For equity investments, there are taxes like Securities Transaction Tax (STT), short-term and, long-term investments, dividend distribution tax, and capital gain tax. Same way equity mutual funds and debt mutual funds also attract certain taxes. These taxes may eat away certain portion of your income generated from equity shares or mutual funds. The investors should be able to factor in these costs correctly to arrive at a sum that they will receive in future. 

If investors fail to gauge these aspects properly then their returns may fall short of expectation. Virendra Ranawat, CEO, MYSIPonline explains, "Equity mutual funds invest predominantly in the equity-related instruments and are thus taxed in the similar way the instruments of stock market are taxed. There are two types of taxes on your equity mutual funds, STCG (short-term capital gains) and LTCG (long-term capital gains) depending on the duration of your investments. If the investment tenure is less than 1 year, then a STCG tax of 15 percent will be applicable on the gains. In case the investment tenure is more than 1 year, then LTCG tax of 10 percent will be applicable on gains of more than Rs 1 lakh, without indexation benefits." 

For debt mutual funds, the LTCG tax of 20 percent is applicable with indexation benefits, if the units are held for more than 36 months. In case the units are sold before the time frame, STCG tax will be applicable, which is similar to the tax bracket of the investor. 

In addition to the above-mentioned taxes, you will also have to pay a small part in the form of STT (Securities Transaction Tax), which can be easily spotted in the transaction reports, Ranawat stated.

Tax expert Sunil Garg said that the investors should know how much tax they are paying on their returns. "If you invest in equities directly then you have to pay securities transaction tax of 0.1 percent for buying and selling each stock.  Besides that, there are taxes like LTCG, and STCG, taxes on dividend, among others. The investors must check their statements very carefully to figure out the exact figure," Garg said. 

We often ignore this part, but tax part eats away a big portion of our income from the financial instruments. He said that the investors must understand the exact impact of tax on their investment to understand their actual return. If a stock appreciates 5 percent, that does not mean that the person will get the entire benefit. He has to pay STT, STCG or LTCG, and any other tax applicable, besides brokerage to the broker.