Tax saving is the word that everyone loves – government excluded! The reason for this is straightforward. Taxation is an unavoidable part of investing and wealth creation.
India taxes both short-term and long-term capital gains on equity and mutual funds. If you are confused with the big words, stick to this article for a few more minutes to find out.
Tax treatment of dividends, mutual funds, and capital gains has changed significantly over the years, reducing some of the tax advantages previously available to investors.
However, with some knowledge of taxation and tax planning, you can save thousands in taxes every year. This article will introduce some easy smart tax-saving tips for traders and investors.
Before I directly explain to you how to save taxes or tax saving ideas, here are a few terms and tax rules that you need to understand related to Trading and Mutual Funds taxation.
Note: All the rules and terminologies are related explicitly to Stock Trading and Mutual Funds. It may not apply to selling other capital assets like house property or land.
Capital Gain: Any profit arising from the transfer of a capital asset such as shares, mutual funds, bonds, or other eligible investments.
Long Term Capital Gain (LTCG): Whenever you sell stocks/equity/shares or equity mutual fund after holding it for more than 12 months, the profit/loss derived from it is called long-term capital gain/loss.
Short Term Capital Gain: Whenever you sell stocks/ equity/shares or mutual funds after holding them for less than 12 months, the profit/loss derived from them is called short-term capital gain/loss.
Equity Mutual Fund: Mutual funds with more than 65% allocation in equity.
Debt Mutual Fund: Mutual fund with less than 65% equity allocation.
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Now that you know the basic terminologies and taxability rules on capital gains, let’s move forward towards saving taxes.
As an investor, your returns could be cut from 20% to 16% if you don’t plan your taxes correctly. The tax saving tips for traders given below are not based on loopholes or exploitation of relaxations.
These traders’ tips for tax saving are 100 percent legal and genuine methods of saving tax. Indian government provides a few options for tax saving to boost investment and encourage savings.
The first and foremost traders’ tips for tax saving option is to claim an 80C deduction in your income tax returns. ELSS is an equity mutual fund eligible for deduction under Section 80C and comes with a mandatory lock-in period of three years.
If you invest up to INR 1,50,000 in an ELSS under the old tax regime, you may claim a deduction under Section 80C. The actual tax saved depends on your applicable income tax slab.
The best part about ELSS savings is you can save tax with this investment whether you are salaried, self-employed, or professional.
Holding eligible equity investments for more than one year may result in a lower tax rate (12.5% LTCG versus 20% STCG) and may also allow you to utilize the annual LTCG exemption of INR 1.25 lakh.
The most important reason to tell you about STCG and LTCG at the beginning of the article was to enlighten you about the importance of dates.
Always record your purchase dates and plan before you want to sell stock. You can sell stocks or mutual fund holding for a few days more to fall in the lower tax rates of LTCG.
Example
Suppose you purchased shares on 31 December 2025. If you sell them before completing 12 months, the gain may be treated as short-term capital gain. By waiting until after 31 December 2026, the gain may qualify as long-term capital gain and become eligible for the lower LTCG tax treatment applicable to listed equity shares.
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An exemption of INR 1.25 lakh is granted for LTCG on equity and equity mutual funds. If you are not a high-value regular investor, you can plan your stocks or mutual funds so that capital gains do not exceed the exemption limit.
To do this correctly, you need to understand a financial year. The financial year starts on 1st April of the year and ends on 31st March of the subsequent year. Any profits made during this period are referred to as Capital Gain for the year.
If your eligible LTCG on equity shares and equity mutual funds has already reached INR 1.25 lakh in a financial year, keep hold of sales of your other investments for the next financial year.
This is probably one of the most helpful tax saving tips for traders and investors. Certain provisions of the Income Tax Act provide capital gains exemptions when eligible gains are reinvested in a residential property, subject to various conditions.
Since these provisions depend on the nature of the asset sold and other eligibility requirements, investors should seek professional tax advice before relying on such exemptions.
These exemptions generally apply only in specific capital gains situations and may not be available for gains arising from listed equity shares or equity mutual funds.
The Income Tax Act also provides certain capital gains exemptions through investment in specified government-notified bonds, subject to eligibility conditions. These exemptions are available only in specific situations and may not apply to all types of capital gains.
Investors should carefully verify eligibility conditions, timelines, and investment limits before opting for such exemptions. These bonds are generally not available for gains from listed equity shares or equity mutual funds.
As I have mentioned earlier,
Capital Gain = Sale Consideration – Cost of Acquisition – Transfer Expenses
Most rookie investors make the mistake of not recording brokerage and other allowable transfer expenses incurred while buying and selling investments.
Note: Certain expenses such as Securities Transaction Tax (STT) are generally not allowed as a deduction while computing capital gains.
Claiming eligible transfer-related expenses lowers capital gains, which in turn may reduce taxes. Keeping all the correct data through an Excel sheet or portfolio management app would help you to save on taxes.
Historically, indexation was an important tax-saving tool for certain long-term capital assets and debt-oriented investments. However, tax rules relating to indexation have changed significantly in recent years, and the benefit is now available only in limited situations. Investors should verify the latest rules before making investment decisions based on indexation benefits.
Note: Indexation benefit has been removed for most asset transfers made on or after 23 July 2024. It now applies only to resident individuals and HUFs selling immovable property acquired before 23 July 2024. The example below is for illustrative purposes only.
Accept that there will not always be profits if you are trading in stocks. Most people think loss is useless, but even a broken clock is right twice a day, and so is the case with losses. You can set off your losses with your profits in the same year or subsequent years.
The key point for traders to note is keeping accurate records of losses and profits to set off losses against gains and reduce capital gains taxes.
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In certain cases, frequent and high-volume trading activity may be treated as business income rather than capital gains, depending on the facts and circumstances of the case.
The classification depends on factors such as trading frequency, holding period, volume of transactions, and the taxpayer’s intent. There is no fixed turnover threshold prescribed under the Income Tax Act.
The best benefit among these tips for traders is that the income will be treated as business income rather than capital gain. Capital Gain taxes are calculated directly on all the profits made on sales, while business income is calculated only after deducting all expenses.
You can claim all other expenses that you have incurred to earn this income like rent, depreciation, salary, telephone bills, and internet expenses.
Example
Although there are thousands of rules related to these, here is a simple example for basic understanding.
Suppose you have bought stocks worth INR 10 lakh and sold them at INR 15 lakh in six months. Expenses incurred are INR 20,000 as brokerage.
Capital Gains as an Income source:
Capital Gain = INR 15 lakh – INR 10 lakh – INR 20 thousand
Taxes = 20.8% * INR 4,80,000 = INR 99,840
As Business Income:
Profit = INR 4,80,000 less eligible business expenses
Tax liability will depend on the taxpayer’s applicable income tax slab and total taxable income.
Therefore, while business income treatment may allow deduction of eligible expenses, it does not necessarily result in lower taxes. The overall tax impact depends on the taxpayer’s income level, trading activity, allowable expenses, and applicable tax slab. Professional advice should be taken before choosing this approach.
ClearTax Income Tax Software can help you calculate your tax liabilities and save your taxes correctly. ClearTax is used by thousands of taxpayers and small businesses all over India to manage their income tax and GST. ClearTax can help you to:
*These exemptions come with multiple clauses and exceptions. Please take professional advice if opting for any of these exemptions.
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