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We all work hard every day to earn money and live a comfortable lifestyle for ourselves and our loved ones. Working hard to earn money is not enough to build wealth. For wealth creation, you have to Make your money work for you Also, instead of letting it sit idle in your savings account.
That’s why we invest our hard-earned money in investment vehicles like stocks, mutual funds, bank FDs, gold, PPF and real estate.
But are you aware of the tax laws applicable to such investment instruments? After all, earning money and investing in wealth creation is not enough to complete your investment planning process. Being is just as important. Find out the amount and the tax applicable on the returns on him.
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So let’s dive deeper and give you a fair idea of how much tax you have to pay on your investment.
Tax laws b Equity shares
As per income tax laws, Any gain from the sale of shares is subject to capital gains tax.. Investors can choose to invest in listed domestic equity shares, unlisted domestic equity shares or foreign equity shares in India and each has a different tax treatment. Let’s get together, people, people, people, people, people, people, people, people.
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Listed domestic stocks
If listed shares are held for less than 12 months before being sold for profit, the profit is short term capital gain (STCG). Similarly, capital gains held for more than 12 months are long-term capital gains (LTCG) from stocks.
For listed domestic shares, the STCG rate is 15% and the LTCG tax rate is 10%. 10% LTCG is calculated after exemption up to Rs. 1 crore on total long-term capital gains during the financial year.
Unlisted domestic equity shares
In case of unlisted domestic equity shares, LTCG tax rules apply if the holding period is 24 months or more. Therefore, STCG tax rules apply to investments with a holding period of less than 24 months.
In case of unlisted domestic equity shares, STCG is applicable based on the income tax slab rate for the investor’s financial year. LTCG, in this case, is calculated as 20% profit along with the index benefit.
Foreign equity shares
Resident Indians can invest up to US$2.5 lakh in foreign exchange-listed shares in a financial year. From a tax perspective, foreign equity shares are similar to unlisted equity shares. Therefore, capital gains from foreign equity shares held for less than 24 months are treated as STCG, while LTCG tax rate is applicable if the holding period is more than 24 months.
The tax rate of STCG on foreign equity shares is as per the income tax slab of the investor. Similarly, the rate of LTCG tax applicable to foreign equity shares is 20% with indexation.
Also Read: Why do companies list shares on the stock market?
Tax laws of mutual funds
Depending on the type of investment, mutual funds can be classified as equity mutual funds, debt mutual funds or hybrid mutual funds. Since the tax rules of Mutual Funds differ depending on the underlying investments, let’s take a look at how much tax you have to pay on mutual funds.
Equity mutual funds
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Also Read: Do Mutual Funds Invest Only In Stocks?
Equity Mutual Funds invest 65% or more of their assets in equity-oriented stocks such as domestic equity stocks.
If you sell/redeem equity mutual fund units within 1 year, STCG tax is levied on short-term capital gains. At 15% profit rate.
If you withdraw your equity mutual fund after 1 year of investment, profits up to Rs 1 lakh in a year will be tax free. LTCG tax of 10% is levied only on capital gains above Rs 1 crore.
Debt mutual funds
Debt mutual funds must invest 65% or more of their assets in debt investments such as bonds, T-bills, certificates of deposit, etc.
The returns you register to redeem your debt mutual fund within 3 years are treated as short-term capital gains, which are included in your annual income and payable as per your income tax schedule.
However, the returns on investment after 3 years are treated as long-term capital gains and are paid at the rate of 20% indexation benefits.
Mixed funds
Taxability of a hybrid mutual fund depends on whether equity-oriented investments comprise up to 65% of the scheme’s portfolio.
Simply put, if a mutual fund invests 65% or more of its assets in equity-oriented investments, it is taxed as an equity mutual fund. Otherwise, if equity-oriented investments comprise less than 65% of the hybrid mutual fund’s assets, it will be taxed as a debt mutual fund.
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Also read; Benefits of investing in mutual funds through CPS
International funds
In recent years, international funds have gained some popularity among investors. Although these mutual funds invest in stocks, global funds that invest primarily in equity shares listed on foreign stock exchanges are taxed like debt mutual funds.
Therefore, units of Global Funds sold at a profit before completion of 3 years will be taxed as per the income tax slab of the investor. And, those held for more than 3 years before redemption are eligible for long-term capital gains equal to 20%.
exchange of traded funds
Currently there are 4 types of ETFs in India – Index ETFs, Sectoral ETFs, Gold ETFs and International ETFs.
Index ETFs and Sectoral ETFs are viewed similarly to equity-oriented investments. Therefore, for periods exceeding 12 months, LTCG tax is applicable at the rate of 10% on gross profit exceeding Rs 1 lakh in a financial year. STCG tax is applicable at 15% for periods less than 12 months.
Gold ETFs and Global ETFs are taxed similarly to debt mutual funds. Therefore, if the holding period is less than 36 months, STCG tax will be applicable as per the income tax slab of the investor. And if the tenure is more than 36 months, LTCG tax is applicable at 20% with indexation.
Taxes for fixed income investment
Fixed income investments such as bonds may be listed or unlisted, which affects the rules governing investment taxation. Listed are examples of debt instruments. debts, corporate bonds, Government securitiesinter alia.
noSuch investments, LTCG is applicable if the tenure is more than 12 months and STCG is applicable if the tenure is less than 12 months. The cost of STCG on these investments depends on the income tax slab of the investor. LTCG tax rate is 20% with indexation or 10% without indexation.
But as per the existing tax laws, the indexation benefit is applicable only to a few listed debt instruments such as RBI and capital indexed bonds issued by the Government of India.
In case of unlisted bonds and debentures, a grace period of 36 months is applicable for determining short-term or long-term capital gains. In this case, the tax rate of STCG is as per the income tax slab of the investor. LTCG tax rate for unlisted debt instruments is 20% without indexation.
as far as Bank fixed deposit (FD) We are concerned, Banks will deduct tax at source while disbursing interest to your account if the amount of interest exceeds Rs.40,000 for non-senior individuals (in case of senior citizens the threshold is Rs.50,000).
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Remember that TDS is deducted at the time of interest loan and not when the FD matures.
And that’s not all. of Tax liability of FD investors does not end with TDS deduction. Done by banks. The total interest income on your FD is added to your annual income and taxed as per the deposit tax slab, which makes the post-tax returns of bank FDs very low especially for those who fall in higher tax slabs. The difference between the actual tax liability and the deducted TDS is adjusted while filing income tax returns.
Even for 5-year tax-saving bank FDs, which offer the benefit of tax deductions of up to Rs 1.5 lakh per accounting year under Section 80C of the Income Tax Act, the interest earned on these will be taxed as per your tax slab, reducing your post-tax returns.
as far as PPF (Public Provident Fund) is concerned. Totally tax freeshowing that Interest earned and maturity amount are tax free.
Also read: Explained: How banks calculate interest when you break your fixed deposit
Tax laws b Gold investment
Gold is the most popular and preferred investment vehicle in our country. And this makes it all the more important for gold investors to understand the taxes that apply on it.
Although traditionally the physical form of gold is most popular for investment purposes, in jewelry, gold coins and bars, gold can be purchased as digital gold, gold ETFs, gold mutual funds and sovereign gold bonds.
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Regarding taxation, physical gold, digital gold, gold ETF and gold Mutual funds They are considered as such. All these gold investments are eligible for LTCG if the holding period is more than 36 months and the rate of LTCG is 20% with the index. The tax rate of STCG is based on the income tax slab of the investor for a period of less than 36 months.
As far as sovereign gold bonds are concerned, all capital gains are tax-free when the bond matures.. However, if an investor exits this investment before maturity, the same STCG and LTCG tax rules as other gold investments are applicable.
Also read: Kerala became the first state in the country to introduce a uniform gold standard
Tax laws for real estate investments
Apart from gold, the most popular investment vehicle in our country is real estate. For real estate investment, STCG tax rules are applicable for less than 24 months, while LTCG rules are applicable if the holding period is more than 24 months.
The STCG tax rate is as per the investor’s income tax slab rate. The applicable LTCG tax rate on these investments is 20% with indexation. But that’s not all.
The purchase and sale of real estate presents some additional tax rules. These include 1% TDS on property sales above Rs. 50 lakh, compulsorily reporting sales above Rs. 30 lakh to Income Tax Department etc.
And in recent years, another type of real estate investment has gained popularity in India You can invest in real estate without actually buying the property. It is through real estate investment trusts or REITs. Currently, there are two key types of REITs in India: listed REITs and mutual fund REITs.
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You can buy REITs listed on stock exchanges, for which a Demat account is mandatory for this investment.. A holding period of more than 36 months is necessary for these REITs to achieve long-term capital gains. The STCG tax rate on units of REITs held for less than 36 months is 15 percent. The tax rate of LTCG on REIT investments is 10% on profits above Rs. 1 thousand.
In addition to this, investors can buy REITs mutual funds like Global REITs Fund without any account. These investments are taxed according to the rules applicable to debt mutual funds. So the rate of STCG depends on the income tax slab rate of the investor if the holding period is 36 months. In contrast, the LTCG tax rate for REITs Mutual Funds is 20% with reference if the holding period is more than 36 months.
Also read; Should real estate be part of your portfolio?
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