Pick equities for saving tax, low transaction cost

Savings accounts and fixed deposits had been the “default” destination for most Indians’ hard earned money. For some others, it had been gold and real estate. Thanks to demonetization and the government’s drive against black money, people have started investing in equities in search of good “yields”.

If we look at the 10 richest people globally, the one thing that is common in all of them is that all of them would be founders, heirs or top management personnel at some of the businesses.

So it’s clear that business operations is the prominent driver behind the wealth of the richest in the world, and not bank deposits or gold. Look at how the world around you has improved over the years. More people are buying houses, cars, ACs etc. compared to a decade back.

All these show the sheer power of wealth creation that has been unleashed by innovative enterprises. These businesses, in turn make wealth for their shareholders, as a reward for the benefits they contribute to the economy.

In an emerging country like India, the increasing middle class makes this process of wealth creation even faster. The rising numbers of the middle class create higher demand for goods and services, which are fulfilled by businesses, creating wealth for their shareholders.

As a small investor, stock market opens the path for you to participate in the wealth creation by businesses. The superior performance of equities as an asset class is a testament to this. Between 2001 and 2015, real estate, gold, and the Sensex returned 12%, 12.4%, and 15% gains annually.

From a tax perspective as well, equities are more attractive. With gold and real estate, you have to pay wealth tax while you hold them. Further, when you sell them, you have to pay tax on capital gains. Real estate transactions are also costly, since they attract stamp duty. With equities, in addition to low transaction costs, your capital gains are completely tax exempt if the holding period exceeds one year.

The writer is CEO, MarketSmith India

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