Income Tax: How to minimise tax liabilities while maximising investment returns?
Almost threefold growth has occurred in Indian benchmarks over the past decade. The meteoric rise of the stock market has also attracted retail investors' participation in India's equity markets. Income from investments attracts taxes in the form of dividend distribution tax (DDT), long-term capital gains (LTCG), and short-term capital gains (STCG), which individual investors must understand carefully. If investors do not engage in proactive tax management, these taxes have the potential to reduce their total returns.
To help retail investors minimise their tax obligations and maximise their gains, this article aims to present some easy tax management rules, mainly for retail investors.
First, retail investors should understand the pecking order of investments in order to minimise tax liability. A well-balanced portfolio includes both taxable and tax-exempt assets. Interest earned from certain investments, such as tax-saving fixed deposits, NPS, Sukanya Samriddhi Yojana, EPF, PPF, etc., are not subject to taxes.
Investors seeking lower tax liability can explore various investment options, such as the stock market, bonds, commodities, etc., once they use all tax-free deposits available under these schemes.
Second, investors must choose between dividend and growth stocks wisely. For example, growth stocks are a better bet for investors in high-tax brackets than dividend stocks because dividend income is taxed at the same rate as current income.
Investing in several PSU and FMCG stocks can result in larger tax liabilities because of their high dividend yields. Conversely, there is a 15% cap on the capital gains from the stock market.
Another important way to reduce tax liability is to invest in assets where indexation
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