How to save tax on profit from stock market?

6 Smart Tips For how to save tax on profit from stock market

  • Tax harvesting
  • Invest though tax Advantage Account
  • Tax Efficient Investment.
  • Dividend Reinvestment,
  • Gifts and Donations,
  • Purchasing Property

1) What is the meaning of Tax Harvesting

In simple language you have any liable to pay tax amount you can reduce that tax amount or either you can delay it for paying tax amount. Tax harvesting is a strategy used by investors to offset gains and reduce their tax liability. It involves selling stocks that have experienced a loss or profits to offset the capital gains realized by selling other stocks By realizing profits or losses, investors can lower their overall capital gains taxes.

Profit also called as a gain there are two types such as Long term Capital Gain and Short term Capital Gain. Long term Capital Gain is applicable to sold investment after 1 year of investing, wise a versa Short term Capital Gain is applicable to sold investment within 1 year of investing.  

Long term Capital Gain

Example- If you are investing 1,00,000 as on the date of 14th April 2022 and you can sold the investment as on the date 30th April 2023 and you have earn Profit 1,22,000 that amount is Long term Capital Gain. you have to pay tax 10% on your gaining amount.
22000*10% =2200

2200 is Long term Capital Gain Tax

As per the Income tax Act in case Long term Capital Gain you have not liable any tax for gaining amount below 1,00,000 Rs.

Short term Capital Gain

Example- If you are investing 1,00,000 as on the date of 14th April 2022 and you can sold the investment as on the date 15th July 2022 and you have earn Profit 1,16,000 that amount is Long term Capital Gain. you have to pay tax 15% on your gaining amount.
16000*15% = 2400

2400 is Long term Capital Gain Tax

1) Profit Harvesting- Profit harvesting refers to a strategy where an investor sells a portion of their holdings to realize profits. This strategy is often employed when the investor believes that the stock’s price may have reached his expectation price or is unlikely to increase significantly in the near future. By selling some of their shares at a profit, the investor locks in their gains and reduces their exposure to losses if the stock price were to decline. Profit harvesting is a common practice among investors looking to manage their risk and optimize their returns in the share Market

Example

A) In case Man A Investment

A Investing Amount as on the date of 1st June 2022Rs.20,00,000
He expecting Profit Rs.3,00,000After 2 Year
He will meet his expectation3,00,000
He will sold his share as on the date 15 July 202423,00,000
Long term Profit Earn Rs.3,00,000
As per the Income Tax Deduction1,00,000
Taxable Gain2,00,000
10% Tax to be paid20,000



b) In case Man b Investment

B Investing Amount as on the date of 1st June 2022Rs.20,00,000
He expecting Profit Rs.3,00,000After 2 Year
But, He will meet expectation profit for First year, and book the profit for 1st1,00,000
As per the Income Tax Deduction1,00,000
Tax in 1st Year Rs.0
In second year he will meet his expectation stock price is Rs.23,00,000
In 2nd year Profit is Rs.2,00,000
As per the Income Tax Deduction, he will again get deduction of Rs.1,00,000
Taxable Gain1,00,000
10% Tax to be paid10,000


Comparison is Both are earning Same Profit But Mr. A will be pay 20,000 tax amount and Mr B will be Pay Rs.10,000 tax amount, Mr B have save tax on profit.


2) Loss Harvesting- Loss harvesting is a strategy used by investors to offset capital gains taxes by selling investments that have experienced a loss. When an investment is sold at a loss, the investor can use that loss to offset capital gains realized from other investments, reducing their overall tax liability. The investor can reinvest the proceeds from the sale in a similar but not identical investment to maintain their desired asset allocation. Loss harvesting is typically done near the end of the year to take advantage of tax benefits for that tax year.

 Year 1stQuantityBuying PriceInvesting AmountPrice Per Stock after 1 yearAmount after 1 yearTaxable Income (Booked Profit or Loss)Income tax deduction taxable incomeTax Payable (10%)
Mr. AStock A1200012014,40,00015018,00,0003,60,0002,60,00026,000
 Stock B1500015022,50,000130
          
 Year 2ND        
 Stock A0
 Stock B1500015022,50,00015022,50,000000
        Total Tax26,000
          
Mr BYear 1st        
 Stock A1200012014,40,00015018,00,0003,60,00060,000 (below 1,00,000)0
 Stock B1500015022,50,00013019,50,000-3,00,00000
          
 Year 2ND        
 Stock A0       
 Stock BAgain buy after loss- 1500013019,50,00015022,50,0003,00,0002,00,00020,000
        Total Tax20,000


Mr B having Loss harvesting he will save 6,000 tax on his gaining and he will save tax on profit

2) Invest though tax Advantage Account


Income Tax also depend on which type of accounts you are investing, If you are ) Invest though tax Advantage Account as per income tax section 401(K) you can provide tax benefit. It is applicable only in the US. These Type of accounts Capital Gain tax is deduct able or save tax on profit. 

3)Tax Efficient Investment

Your investment is Tax Efficient like index funds or exchange-traded funds (ETFs) that typically have lower turnover and generate fewer taxable events compared to actively managed funds.

4) Dividend Reinvestment

If you receive dividends on your stock, reinvesting them instead of taking them as cash can help defer taxes until a later date.

5) Gifts and Donations:

Donating appreciated stock to charity can allow you to avoid paying taxes on the capital gains while also potentially qualifying for a charitable deduction. This is ultimate way of save tax on profit.

6) Purchasing Property

As per Income tax section 54(F) you selling your long term investment and you have purchasing a property within year the you will not liable for long term gain. The greatest way to save tax on profit also investing double sided like stock and property.

Example

Man 1 Invest amount Rs.5,00,000
After some time that investment amount will be15,00,000
Profit at the time of sell10,00,000
Profit amount will be used for Property down payment10,00,000

 
In this case save tax on profit

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Conclusion

Save tax on profits from the stock market requires strategy understanding of tax laws. One of the key strategies is tax harvesting, where investors sell stocks to offset gains and reduce tax liability. Loss harvesting is another tactic, allowing investors to sell losing investments to offset gains. Investing through tax-advantaged accounts like a 401(k) can also provide tax benefits. Choosing tax-efficient investments and reinvesting dividends can further optimize tax savings. Additionally, gifts, donations, and property purchases under specific conditions can help reduce or defer taxes on stock market profits.

How can I save tax on profit from the stock market?

Read above Blog you will get answer How to save tax on profit from stock market?

What are the tax implications of trading in derivatives in the stock market?

Profits from trading such as futures and options, are treated as business income and taxed at the applicable slab rates. Losses can be set off against other heads of income. It is recommended to maintain detailed records of transactions for tax purposes.

Is there any benefit for senior citizens in terms of tax on stock market profits?

Senior citizens (individuals aged 60 years and above) can available higher tax exemption limits and deductions under certain sections of the Income Tax Act. They can also benefit from the lower tax rate on long-term capital gains from equity investments exceeding ₹1 lakh.

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