Equity-based investment avenues have earned significant popularity in India. One of the biggest reasons for this is that they offer high returns. Additionally, investors prefer equity-based options because of their tax benefits.
Stocks, equity mutual funds, and Unit-Linked Insurance Plans (ULIPs) are three well-performing investments. You can choose to put your hard-earned money in a ULIP policy, stock, or equity mutual fund based on your long-term and short-term financial goals.
However, it is wise to first learn about how they are taxed before deciding where to invest. Here, we explain them in detail for your convenience.
#1. What Are Stocks, And How Are They Taxed?
When you are buying a stock, you are earning a fraction of a company’s ownership. Here, you are entitled to receive a portion of the company’s profits. Depending on how many units of stock (shares) you own, you will receive the earnings accordingly.
Buying or selling stocks require you to pay a brokerage charge along with a service tax on it. Other than that, you are also liable to pay the Securities Transaction Tax (STT). Both the seller and buyer need to pay a 0.1% STT for delivery trades. In the case of intraday trades, the seller has to pay a 0.025% STT.
When you make long-term capital gains over INR 1 lakh from stocks in a year, you must pay a 10% tax on it. Including surcharge, the tax amount goes up to 10.40%. Capital gain from stocks is long-term only if you stay invested for at least a year. You have to pay a 15% tax for short-term capital gains, which goes up to 15.60% with a surcharge. If you earn dividends from an Indian company, the tax amount will depend on your income tax slab.
#2. What Are Equity Mutual Funds, And How Are They Taxed?
An equity mutual fund is a lucrative investment avenue. When you put money in this instrument, fund managers use your capital to invest in equities or stocks of various companies across all market capitalization’s. As the returns from equity mutual funds depend on the financial market’s performance, it is a high-risk, high-return investment instrument.
Here, long-term capital gains over INR 1 lakh in a year are taxed at 10%. Short-term capital gains have a tax rate of 15%. Dividends earned are taxable in the same way as stocks. However, you need to pay a 0.001% STT to buy or sell the units of an equity mutual fund. So, the tax involved is much lower compared to stocks.
#3. What Are ULIPs, And How Are They Taxed?
ULIPs bring the dual benefits of a life cover and wealth build-up. You have to pay a regular premium to keep the policy active. Insurance providers invest your premium amount in equity, debt, or a combination of multiple funds, depending on your financial goals and risk appetite. So, you can invest at your convenience. With ULIP returns in 10 years or more, you can achieve your long-term life goals.
As a ULIP is a life insurance policy, its taxation is different from stocks and equity mutual funds. Section 80C of the Income Tax Act, 1961, allows you a maximum annual tax deduction of INR 1.5 lakh on the premium paid.
As per Section 10 (10D) of the Act, if you had bought the ULIP policy before April 1, 2012, and the yearly premium is lower than 20% of the sum assured, you need not pay any tax on the maturity benefit. However, if you purchased the policy after April 1, 2012, the annual premium must be below 10% of the sum assured to avail of a tax exemption on maturity. As per the latest Budget 2021 proposal, for policies bought after or on February 1, 2021, you must pay a 10% tax on the maturity amount if your yearly premium is over INR 2.5 lakh.
As you have an idea that ULIP scores over stocks and equity mutual funds when it comes to offerings and taxation quickly compare the top performing ULIP funds online and find a suitable one.