Tax on Investments
Taxation plays a very important role in the returns generated by your investment and so you should know how the investment is taxed before you choose one. We list down the most common investments and how they are taxed?
Fixed Income/Debt Investments:
1. Saving Bank Account:
Interest earned in Saving bank account up to Rs 10,000 is exempted from tax u/s 80TTA. Any interest more than Rs 10,000 is added to your income and taxed at income tax slab rates.
There is NO TDS on interest earned on saving bank account.
This is also applicable for Post Office Savings Account.
Also Read: Which Bank offers Highest Interest on Saving Bank Account?
2. Bank Fixed Deposits:
The entire interest earned on Bank FD is added to the income and taxed according to the income tax slab rates.
TDS of 10% is deducted if the annual interest exceeds Rs 10,000. Interest across all Fixed Deposit/ Recurring Deposit accounts across all branches of a bank is taken into consideration to arrive at the total annual interest figure for TDA.
If NO PAN is linked to the FD account the TDS rate is 20%.
Also Read: Highest Interest Rate on Bank Fixed Deposits
3. Bank Recurring Deposits:
Budget 2015 made the tax and TDS structure for Recurring Deposit same as Fixed Deposit.
Earlier no TDS was deducted for RD deposits.
4. Company Fixed/Recurring Deposit:
The entire interest earned is added to the income and taxed according to the income tax slab rates.
TDS of 10% is deducted if the annual interest exceeds Rs 5,000.
Also Read: High Rated Companies Offering more than Bank Fixed Deposits
5. NCDs/ Bonds:
The interest earned on bonds/NCDs is fully taxable as per income tax slab rate.
TDS of 10% is deducted if the annual interest paid exceeds Rs 5,000. However, there is NO TDS if the bond/NCD is held in Demat form.
Capital Gains Tax on Bonds:
In case the bond/NCD is sold through exchange before maturity, it entails capital gains. If the holding period is less than 1 year, it is Short Term Capital Gains and taxed according to income tax slab.
For holding period of more than 1 year, the gains are Long Term Capital Gains and are taxed at flat rate of 10%. There is no indexation benefit available.
Also Read: Latest Issues of NCDs
6. Tax Free Bonds:
As the name suggests the interest earned on tax free bonds is tax free.
But if tax free bonds are sold before maturity, it leads to capital gains.
Investment for less than 1 Year -> Short Term Capital Gains -> taxed according to income tax slab
Investment for more than 1 Year -> Long Term Capital Gains -> flat rate of 10% (no indexation benefit)
Small Saving Schemes:
7. Post Office Saving Account:
Interest up to Rs 3,500 for single holder account and up to Rs 7,000 for joint account in Post Office Saving Account is tax free u/s 10(15)(i). The remainder interest will get added to your income and will be taxed at the applicable rate of income-tax.
There is NO TDS on Post Office Saving Account.
Also this exemption is over and above tax exemption offered by 80TTA.
Example: You have Rs 9,000 interest from Bank account and Rs 5,000 from Post Office Saving Account; you can claim Rs 3,500 tax exemption u/s 10(15)(i) for post office account and Rs 9,000 for bank account & Rs 1,000 for Post office account (total – Rs 10,000) u/s 80TTA separately.
Also Read: Latest Small Savings Scheme Interest Rate
8. PPF (Public Provident Fund)
The interest received is tax free
9. Senior Citizen Saving Scheme:
The interest received is added to income and taxed at marginal income tax rates.
There is NO TDS.
10. NSC/KVP
The interest received is added to income and taxed at marginal income tax rates.
There is NO TDS.
Also Read: PPF – A Must Have Investment
Retirement Plans:
11. NPS:
20% of the maturity corpus is taxed at income tax slab applicable to you.
40% of corpus should be used to buy annuity. The monthly pay out received is fully taxable.
12. Pension Plans:
1/3 of pension maturity amount can be commuted (withdrawn in lumpsum) and is tax free
The rest 2/3 amount should be used to buy annuity. The monthly pay out received from annuity is fully taxable
Also Read: Should you Invest Rs 50,000 in NPS to Save Tax u/s 80CCD (1B)?
13. EPF (Employee Provident Fund)
Maturity amount received form EPF is fully tax free if you have continuous service of more than 5 years.
In case the service period is less than 5 years, the amount is taxable as per income tax slab rates.
TDS at 10% is deducted for premature and taxable withdrawal of funds from EPS, if the payment is more than Rs 50,000.
In case the PAN information is not furnished the TDS would be deducted as 20%.
Mutual Funds:
For tax purpose Mutual Funds are of two types:
Equity Mutual Fund and
Non-Equity Mutual Fund.
Any scheme which has more than 65% invested in equities is treated as Equity Mutual Fund.
14. Equity Mutual Fund/Equity Oriented Balanced Fund/Arbitrage Fund:
If the investment is held for more than 1 year, the gains are classified as Long Term Capital Gains and are tax free.
In case the investment duration is for less than 1 year, the gains are Short Term Capital Gains which are taxed at the rate of 15%.
Dividends received are tax free.
Also Read: Detailed explanation on Mutual Funds taxation
15. Debt Mutual Fund/ Balanced Fund/MIP/ Gold Fund/ International FoF:
If the investment is held for more than 3 years the gains are classified as Long Term Capital Gains and are taxed at 20% after indexation.
Short Term Capital Gains are added to the income and taxed at marginal tax rates.
Dividends are tax free in the hands of investor but funds deduct DDT (Dividend Distribution Tax) of 28.32% before paying.
16. Equity:
If the investment is held for more than 1 year, the gains are classified as Long Term Capital Gains and are tax free.
In case the investment duration is for less than 1 year, the gains are Short Term Capital Gains which are taxed at the rate of 15%.
Dividend incomes up to Rs 10 Lakhs are tax free. Any excess dividend is taxed at 10% flat rate.
Also Read: Best ELSS (Tax Saving Mutual Fund) to Invest
Gold:
17. Gold Jewelry/ Bullion/ Physical Gold:
If the investment is held for more than 3 years the gains are classified as Long Term Capital Gains and are taxed at 20% after indexation.
Short Term Capital Gains are added to the income and taxed at marginal tax rates.
18. Sovereign Gold Bonds
Interest received on gold bonds is taxed at income tax marginal rates applicable to you
If bonds are held till maturity, the capital gains are tax free
If the investment is held for more than 3 years but before sold maturity the gains are classified as Long Term Capital Gains and are taxed at 20% after indexation.
Short Term Capital Gains are added to the income and taxed at marginal tax rates.
Also Read: Sovereign Gold Bonds latest issues
19. Gold Monetization Scheme:
The interest received is tax free.
Also there is No Capital Gains Tax on the appreciation in the value of gold deposited.
Life Insurance
20. Endowment/Money back Policies:
The final proceeds are tax free if the premium paid for all the years are less than 10% of the maturity amount.
Surrender amount exempt from tax after 3 years
TDS at 2% if the total receipts exceed Rs 1 Lakh.
Service tax is applicable on premiums paid.
Also Read: Does Your Life Insurance Offers Tax Benefit?
21. ULIPs:
The maturity amount is tax free if the premium paid for all the years are less than 10% of the maturity amount.
Surrender amount, early partial withdrawals exempt from tax after 5 years
TDS at 2% if the total receipts exceed Rs 1 Lakh.
Real Estate:
22. Rental Income:
A standard deduction of 30% is allowed on rental income. Thereafter the rent received is taxed at income tax slabs applicable to you.
You can also claim deduction for interest paid on home loan. There is no limit of interest deduction for rented home.
Additional deduction can be availed for repairs, home insurance, property tax, etc.
Also Read: Tax Planning Guide for FY 2016-17
23. Sell/Purchase of Property:
The gains are long term capital gains if the property is held for more than 3 years. In this case it’s taxed at 20% after indexation benefit.
Short term capital gains is taxed at marginal tax rate applicable to you.
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