Budget 2020

3 ways to invest in equity and their tax implications


Investing in equities
With the stock markets reaching an all-time high, many investors are increasingly interested in taking at least a small allocation to equities. However, before deciding to invest in equities, it is important for an investor to ascertain a few things like, choice of company, the price at which one should invest, investible amount etc. One can then choose amongst the following options.

Direct investment in shares
For this, one needs to research about the company to invest in. A demat account needs to be opened along with a trading account with a broker. A bank account and KYC compliance is also mandatory.

Equity mutual fund
To be able to invest in MFs, one needs to complete KYC requirements and fill up the application form of the fund house indicating the desired scheme. Once the application is accepted, units are allotted to the investor. Portfolio value of the investment can be ascertained at the end of each business day by multiplying the units with the NAV.

Portfolio management
Investors who wish to invest a higher amount of funds (above Rs 50 lakh) in the equity markets have the option to approach portfolio managers. A portfolio management agreement is entered between the investor and the portfolio manager which spells out the objectives, risks, securities that the latter will invest in as well as the costs and portfolio management charges. The beneficial ownership of shares invested by the portfolio manager remains with the investor in his demat account and hence the investor receives dividends/bonus allotments in his account.

Points to note

  • Capital gains tax on MFs is applicable at time of redemption and not when the fund manager buys or sells securities within the MF portfolio.
  • Capital gains tax on shares invested by the portfolio manager is applicable to the investor at the time of the transaction effected by the former.
  • Customisation of the portfolio is possible with a PMS at a higher cost vis a vis an MF scheme which has a standard portfolio in line with the investment objective of the scheme.

(Content on this page is courtesy Centre for Investment Education and Learning (CIEL). Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta.)





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