In India long term capital gains on equity investments are completely tax free which means if you have been holding a stock for more than a year then you are not required to pay even a single rupee as tax on whatever gains you make on your investments. On the other side, the short term capital gains are taxed at 15%, that is if you sell your equity investment within a year of purchase you need to pay short term capital gain tax at the rate of 15%.
Is there any way to avoid tax on your short term capital gains as well? The answer is yes. The trick is to show the income from shares as business income. But if you are a salaried professional you cannot use that trick for yourself, rather you need to show the income in the name of your non salaried spouse or children. Rather than doing equity investments in your name, do it in the name of your non earning spouse or children. If you already have a portfolio of stocks in your name, just gift it to your wife or children, and from there on any income generated from your equity investments will go into the business income of your wife/children and thus will enjoy all the exemptions allowed in the income tax act.
As per the direct tax code directive, people will not be required to pay any tax on the income upto Rs. 3,00,000. The DTC code is expected to be effective from 2012. With that coming into place, one has the opportunity to save upto Rs. 45,000 (15% of 3,00,000) every year in tax just by investing in the name of the non earning member of your family.
Rs 45,000 /- saved every year and compounded at the rate of 20% will make your bank balance fatter by Rupees 3 Crores in 25 years.
That's quite a lot of money to ignore!!!