Tax planning is an important tool for investors. Its importance is beyond utilising various deductions under Section 80. Planning your capital gains in a manner that minimises your tax burden is also a key part of your tax planning. Investments do not consider tax consequences when they make investment decisions. In some investment instruments, even though your investment amount is not taxable up to a limit, the income you generate as interest can attract tax. This cuts down your return amount. In a high inflationary environment, your post-tax return may only give marginal benefits. Hence, it is important to know the tax implications on your investments and plan your investments accordingly. Let us have a look at the impact of tax on different investment instruments.
Bank Fixed Deposit
A bank fixed deposit is one of the most popular investment instruments among the Indian general population. As the RBI closely monitors this bank-based investment product, your investment is safe. You get returns on the money you deposit in bank fixed deposits. If you invest in a tax-saving fixed deposit with a lock-in period of five years, you can claim a tax deduction on your investment up to INR 1,50,000 per year under Section 80C of the Income Tax Act, 1961. However, the interest you earn on this instrument attracts tax. If the interest income on your fixed deposit is more than INR 40,000 (INR 50,000 in the case of resident senior citizens), the bank deducts a TDS of 10% on the interest income you have earned. This rate is valid if you have provided your PAN details to your bank. Otherwise, the TDS is 20%. The interest income you receive on your fixed deposit investment comes under “income from other sources”. You need to pay tax on this amount according to your tax slab rate.
Public Provident Fund
The Public Provident Fund (PPF) Scheme falls under the ‘EEE’ (exempt-exempt-exempt) tax category. You can claim a tax deduction on your investment up to INR 1.5 lakh in a financial year under Section 80C of the Income Tax Act, 1961. As PPF comes under the exempt category, your interest income and maturity amount also are tax-exempt.
National Savings Certificate (NSC)
You can claim an income tax deduction on your investment in National Savings Certificate (NSC) up to INR 1.5 lakh under Section 80C. The interest you earn on this instrument is added back to your initial investment amount and qualifies for a tax rebate. For instance, you have invested INR 5,000 in NSC. You are eligible for tax exemption on that initial investment in the first year. In the second year, you get tax exemption on your investment as well as the interest that you have earned in the first year. Tax Deduction at Source (TDS) does not apply to NSC payouts. Investors must pay tax according to their income tax slab rate on the maturity amount.
While filing your IT returns, you can your interest income in one of the following ways:
- You can show your interest income from the National Savings Certificate under ‘Income from Other Sources’.
- You can avail of a deduction on the interest you earn from NSC. But, you do not show it as your income. In this case, consider the total interest income you have received over the years as your income in the last year.
- Do not claim the interest you have earned as an income or deduction. In this case, the total interest you have received falls under ‘Income from Other Sources’ in the previous year. You can claim only the interest that you receive in the first four years as a deduction.
Unit Linked Insurance Plan (ULIP)
The premium you pay towards ULIP is tax-exempt up to INR 1.5 lakh under Section 80C. Also, the amount you get on maturity is non-taxable under Section 10(10D). However, this provision applies to only those ULIPs purchased before February 1, 2021. For ULIPs purchased after February 1, 2021, the maturity amount is non-taxable only if the annual premium amount is up to INR 2.5 lakh. If your annual premium is more than this threshold, the maturity amount attracts tax as Capital Gains.
Sovereign Gold Bond (SGB)
The interest you earn from Sovereign Gold Bonds falls under the head, ‘Income from Other Sources’. You need to remember this while filing your IT returns. The interest amount is taxable as per your applicable tax bracket. The instrument does not attract Tax Deducted at Source or TDS. These bonds carry a maturity period of eight years. Your capital gains at the end of this maturity are tax-free. However, if you choose to exit before the maturity period, your capital gains are taxable. If you sell your gold bonds after three years, your capital gains are long-term capital gains (LTCG). The gains you earn in this case attract tax at 20% with indexation and 10% without the indexation benefit. If you hold SGBs for less than three years, you must consider capital gains as short-term capital gains (STCG). This amount is taxable according to your applicable income tax slab rates.
The Capital Gains Tax you incur on the sale of a real estate property depends on the period you hold it. If you hold a land/house/property for less than 36 months, the amount your earn on the sale is a short-term capital gain (STCG). If you hold it for more than this threshold, your income on the sale is a long-term capital gain (LTCG). The amount you earn as STCG becomes a part of your total income for the year. It is taxable according to your applicable tax slab rate. Your LTCG attracts a tax of 20% after indexation, plus a cess of 3%. Your capital gains can be tax-exempt under specific conditions.
According to the budget 2019 change to section 54, if a person sold a home and made capital gains of up to INR 2 crore, they can invest the money in two more houses. However, this service is only available once in a person’s lifetime. The seller must build or purchase a new house using the capital gains generated within three years of the property transaction.
If you have taken a home loan to finance your house, the principal component of your EMI in a year is non-taxable up to INR 1.5 lakh in a year. You get this provision under Section 80C. The interest component of your EMI is tax-exempt up to INR 2 lakh under Section 24 if it is a self-occupied house property. If you have let out your property, there is no limit to claiming interest.
For your investments in equities, the Capital Gains Tax you attract depends on the holding period. The threshold period for the sale of equity shares listed on a stock exchange to fall under either the STCG or LTCG category is 12 months. If you sell your equity shares listed on a domestic stock exchange within this period, you attract a tax rate of 15%, irrespective of your tax slab. If you hold your shares beyond this threshold, you attract a capital gains tax of 10% + applicable cess on your LTCG of more than INR 1 lakh. The 10% LTCG applies after an INR 1 lakh exemption on aggregate long-term capital gains in a year.
If your LTCG is less than INR 1 lakh, your gains on the sale of your equity shares are tax-free. The following table summarises the capital gains tax on equity shares categorised according to their holding periods and their type.
|Type of Equity Share||Holding Period||Type of Capital Gain||Tax Rate|
|Listed Domestic Shares||Up to 12 months||Short-term capital gain (STCG)||15%|
|More than 12 months||Long-term capital gain (LTCG)||10% on aggregate LTCG exceeding INR 1 lakh in a year|
|Unlisted Domestic Shares||Up to 24 months||STCG||According to the investor’s Income Tax slab rate|
|More than 24 months||LTCG||20% with indexation|
|Foreign Shares||Up to 24 months||STCG||According to the investor’s Income Tax slab rate|
|More than 24 months||LTCG||20% with indexation|
Resident Indians can invest up to $2.5 lakh in foreign stocks in a financial year.
Similar to direct equities, the tax on the Capital Gains on your mutual fund investments, depends on the holding period. The taxation on equity mutual funds is the same as that on direct equities. You can summarise Capital Gains taxes on different mutual fund investments in the table below.
|Type of Fund||Holding Period||Type of Capital Gain||Tax Rate|
|Equity Funds||Up to 12 months||Short-term capital gain (STCG)||15% + surcharge + cess|
|More than 12 months||Long-term capital gain (LTCG)||LTCG up to INR 1 lakh is non-taxable in a year. Gains above INR 1 lakh attract tax of 10% + surcharge + cess.|
|Debt Funds||Up to 36 months||STCG||Tax at the investor’s tax slab rate|
|More than 36 months||LTCG||20% + surcharge + cess|
|Hybrid Equity-Oriented Funds||Up to 12 months||STCG||15% + surcharge + cess|
|More than 12 months||LTCG||LTCG up to INR 1 lakh is non-taxable in a year. Gains above INR 1 lakh attract tax of 10% + surcharge + cess.|
|Hybrid Debt-Oriented Funds||Up to 36 months||STCG||Tax at the investor’s tax slab rate|
|More than 36 months||LTCG||20% + surcharge + cess|
Virtual Digital Assets
The Union Budget 2022 proposed an amendment to the Income Tax Act, effective from April 1, 2022, for the taxation of income or gains from virtual digital assets (VDA). According to the new rule, you need to pay a flat tax of 30% on the income that you earn from the transfer of virtual digital assets, including cryptocurrencies and non-fungible tokens (NFTs).
In P2P lending, investors earn income in the form of interest on the amount they lend. In the Fractional Matchmaking Peer-to-Peer Plan from LenDenClub offers up to 10–12%* annual returns on your investment. Similar to the interest earned on any other instrument, such as a fixed deposit, the interest income in P2P lending is also taxable. Lenders’ interest income from peer-to-peer lending comes under “income from other sources” and becomes a part of their taxable income.
To expand your portfolio, it is always a good idea to consider various investment alternatives. Thus, you reduce your risk and you maximise your rewards. You can make investments in safer options such as fixed deposits and government bonds. Consider investing in stocks if you have a high-risk tolerance. One of the rapidly growing, technology-enabled investment opportunities is P2P lending.