The number of people investing in stock market and mutual funds is continuously increasing. Everyone wants to earn handsome profits by investing their savings in equity schemes. But, do you know that a large part of your profits can be deducted as tax? If you are planning to sell shares or equity scheme of mutual fund, then it is very important for you to understand the rules of Short Term (STCG) and Long Term Capital Gains (LTCG) tax. A hasty sale without knowing the rules can significantly reduce the ‘real return’ you get from your hard-earned money.
Why are investors running towards mutual funds?
Nowadays equity mutual funds remain the first choice of common investors. People who are directly afraid of the ups and downs of the stock market choose the safe route of mutual funds. Through these schemes also, investors’ money is invested only in companies listed in the stock market. The stock market gives great returns, but when you sell units to bring those profits into your bank account, the real income gets reduced due to taxes.
The mathematics of profit is decided by time
Before realizing profits, you have to see for how long you have maintained the investment. The actual return you get from any asset depends on how much money you get in your hands after tax is deducted. Tax rules entirely depend on how long you have held shares or mutual fund units in your portfolio. In market language it is called holding period. On the basis of this period, it is decided whether you will be charged short term tax or long term tax.
Huge loss if sold before one year
If you buy shares of a company or units of a mutual fund in the stock market and sell them before the completion of 12 months, then Short Term Capital Gains (STCG) tax is levied on the profit. According to the current rules, this tax is collected at the rate of 20 percent. Let us understand this with a simple example. Suppose, you bought some shares and sold them within a year and made a profit of Rs 1000. Now there will be a tax of Rs 200 on this Rs 1000 at the rate of 20 percent. That means, your real profit will reduce to only Rs 800.
Big relief is available on long term investment
At the same time, if you are patient for 12 months and sell after that, you are kept under the purview of Long Term Capital Gains (LTCG) tax. In long term investment the tax rate reduces to 12.5 percent. That means, on the same profit of Rs 1000, you will have to pay tax of only Rs 125, due to which you will get Rs 875 in your hands.
Along with this, a huge relief is also included for the investors. Under income tax rules, long term capital gains up to Rs 1.25 lakh in a financial year are completely tax-free. If you sell your shares or mutual funds after one year, and the total annual profit on it is only Rs 1.25 lakh, then you will not have to pay a single rupee tax to the government.
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