Can I save tax by investing in the stock market?

Interest rates on small savings and deposits are graduallydeclining each year. So, to get better returns on their investments, people are turning to more lucrative tax saving investment options. The stock marketpresentsan excellent investment opportunity for investors to grow their wealth over the long-term. Among the myriad tax saving investment options, equity funds can be considered an efficient tool for maximum yields.

The article looks at the top benefits of investing in equities.

  • The Rajiv Gandhi Equity Savings Scheme (RGESS)

This scheme was launched in the 2012 Budget for investors who are new to the equity or stock market. As per the scheme, first-time investors in equities having a yearly income of Rs.12 lakh can avail exemption up to 50% of the investment made in equities subject to a maximum limit of Rs.50,000. So, for example, if an investor invests Rs.50,000 in equities, he or she can claim an exemption up to Rs.25,000 under Section 80CCG of the Income Tax Act, 1961. The investor can avail this benefit over three years.

  • Equity Linked Savings Scheme (ELSS)

ELSS funds are an efficient mutual fund tax saver investment option with a lock-in period of three years. Though it does directlyinvest into the stock market, it can be used to diversify your portfolio and reap tax benefits under Section 80C. Investors can claim upto Rs.1.50 lakh deduction as part of the umbrella exemption limit, including other investment options such as PPF, ULIPs and life insurance.

  • Short-term capital gains on equities

Equities are regarded as short-term investments if the holding period is less than twelve months. For other assets, investments can be treated as short-term if the holding period is less than thirty-six months. While other assets are chargeable to tax at the highest tax rate applicable to the investor, in the case of equities, short-term capital gains tax is charged at a concessional 15%. Thus, equities get preferential treatment when it comes to tax on short-term capital gains.

  • Long-term capital gains tax on equities

Equities are treated as long-term capital investments if the holding period is more than twelve months, whereas, for other assets, it is more than thirty-six months. LTCG on ELSS used to be tax-free till March 2018. However, commencing from April 2018, LTCG tax on equities is taxable at 10%. However, the LTCG tax kicks in only after a basic exemption limit of Rs.1 lakh has been exhausted.

  • Set-off/Carry forward of capital gains

Equity investments offer another prominent tax benefit in the form of set-offs. Short-term capital losses can be set-off against short-term gains. Investors can set-off and carry forward the capital losses against capital gains and carry forward for eight consecutive years.


Thus, investing in the stock market can help you save on tax in more ways than one. However, remember not to make equity investments in isolation but, rather, consider your overall portfolio risk, investment objectives and your risk appetite before investing.