As an investor you should be aware of these tax implications so that you can create a tax-efficient investment portfolio.However, your investment decisions should not be based only on tax-saving criteria.

EQUITY   /  Stocks

1. If you hold on to them for a year, the long-term capital gain is tax free

  • As per Budget 2017-18, Exemption of Long Term Capital Gains Tax u/s. 10 (38) available only if acquisition of share is subject to STT (except cases like IPO, bonus issue, rights issue etc.,). STT (Securities Transaction Tax) at the rate of 0.1% is charged on sale of Shares.
  1. Short-term capital gain is taxed at 15%
  2. Dividends are tax free in the hands of investor
    However, effective from Financial Year 2016-17, 10% Dividend Distribution Tax (DDT) is levied in the hands of the investor / HUF / Partnership firm who receives dividend of Rs 10 Lakh or more in a financial year. This has now been extended to Private Trusts / Family trusts (Budget 2017-18).

ETFs

DEBT FIXED INCOME INSTRUMENTS 

Savings a/c 

  1. Interest up to Rs 10,000 is tax free. After that it is taxed at slab rate
    2. TDS is not deducted on savings interest.

Fixed deposits 

  • 1. Full interest earned from fixed Deposits are taxed at slab rate of the individual.
    2.. TDS of 10% is deducted if interest in any financial year crosses Rs 10,000 – If you fail to furnish the PAN number, your bank shall deduct tax at the rate of 20% instead of 10% generally applicable.

Recurring deposits 

1. Full interest taxed at slab rate
2. TDS not deducted on RD interest

Tax-free bonds 

1. Full interest is tax free
2. The long-term capital gain (after holding for 1 year) taxed at 10% if the bonds are traded and sold in the secondary market.
3. Being interest bearing instruments, no indexation benefit allowed
4. Short-term capital gain taxed at marginal rates.

Normal bonds and debentures 

1. Full interest taxed at slab rate. TDS of 10% is deducted, if interest in any financial year crosses the Rs 5,000 mark
2. The long-term capital gain (after holding for 1 year) taxed at 10%
3. Being interest bearing instruments, no indexation benefit allowed
4. Short-term capital gain taxed at marginal rates.

MUTUAL FUNDS 

Equity funds 

1. Long-term capital gain  is tax free –

  • If you make a gain / profit on your investment in a Equity Mutual Fund schemethat you have held for over 1 year, it will be classified as Long Term Capital Gain.
  1. Short-term capital gain is taxed at 15% – The STCG (Short Term Capital Gains) tax rate on equity funds is 15%.
  2. Dividends are tax free

Tax rates for NRIs are as below 

Arbitrage funds- (Provided they maintain equity fund status) 

1. Long-term capital gain (after holding for 1 year) is tax free
2. Short-term capital gain is taxed at 15%
3. Dividends are tax free

Debt funds 

If you make a gain / profit on your investment in a Non-Equity Mutual Fund scheme that you have held for over 3 years, it will be classified as Long Term Capital Gain.

  1. Long-term capital gains taxed at 20% after indexation – Indexation is a technique to adjust income payments by means of a price index, in order to maintain the purchasing power of the public after inflation.
  2. Short-term capital gain taxed at marginal rates
  3. Dividends are tax-free in the hands of the investor, but scheme pays a very high dividend distribution tax of 28.32% – The dividend income received by a debt fund unit holder is also tax free. But, the mutual fund company has to pay a dividend distribution tax (DDT) before distributing this dividend income to its Unit-holders. DDT on Debt Mutual Funds is 28.84%.

Debt-oriented balanced funds 

1. Long-term capital gains (after holding for 3 years) taxed at 20% after indexation
2. Short-term capital gain taxed at marginal rates
3. Dividends are tax-free in the hands of investors, but scheme pays a very high dividend distribution tax of 28.32%

Hence choosing a dividend option in a debt fund is NOT recommended.

 

GOLD 

Gold funds

1. Long-term capital gain (after holding for 3 years) taxed at 20% after indexation
2. Short-term capital gain taxed at marginal rates.

Gold bullion and ornaments 

  1. Long-term capital gain (after holding for 3 years) taxed at 20% after indexation
    2. Short-term capital gain taxed at marginal rates.
    However, kindly note that Long term capital gains arising to any person on transfer of SGB will continue to be taxable at 20% and eligible for indexation benefits. (there has been some confusion w.r.t holding period, as SGBs are listed securities, the bonds if held for more than 1 year, can qualify for LTCG, but there is no clarity on this matter.)

Gold bonds 

1. Small interest received in the middle will be taxed at slab rates
2. Long-term capital gains (after holding for 1 year) taxed at 10%
3. Being interest bearing instruments, no indexation benefit
4. Short-term capital gains taxed at marginal rates.

INSURANCE 

  1. Endowment policies
    Final proceeds tax free if premium in any year did not exceed 10% of the sum assured
    2. TDS of 2% if the total receipt crosses Rs 1 lakh in financial year
    3. Investors should consider service tax paid on premiums also while calculating returns
    4. For endowment plans, it is 3.5% for first year’s premium and 1.75% for the renewal premium.Ulips
    For ULIPs, GST is 18% on all charges (like mortality charges, AMC fees, switch fees, etc)

    REAL ESTATE 

    1. Rent received (or notional rent for the locked up second home) are taxed at slab rate as per Income tax slabs-

  2. If you are claiming HRA (House Rent Allowance) of more than Rs 50,000 per month (or) paying rent which is more than Rs 50,000 then the tenant has to deduct TDS @ 5%. It has been proposed that the tax could be deducted at the time of credit of rent for the last month of the tax year or last month of tenancy, as applicable (Budget 2017-18).
  3. If Land or house property is held for 36 months or less then that, such Asset is treated as Short Term Capital Asset. Short Term Capital Gains are included in your taxable income and taxed at applicable income tax slab rates.
  4. If Land or house property is held for more than 24months then that Asset is treated as Long Term Capital Asset. Long Term Capital Gains on sale of property are taxed at 20% (with indexation). As per Budget 2017-18,  Holding period forLong term capital gainfor all immovable properties has been reduced to 2 years from 3 years. Long Term Capital Gains on sale of property are taxed at 20% (with indexation). This is effective from FY 2017-18 or AY 2018-19.  (The base year for calculation of Indexation is going to be 2001 w.e.f FY 2017-18)
  5. If you receive any rental income from the property then it has to be included in your income and taxed at income tax slab rate.
  6. The buyer of the property needs to pay TDS @ 1%, on sale of property which is valued at Rs 50 Lakh or more.

The Registrar of properties will have to report purchase & sale of all immovable properties exceeding Rs 30 Lakh to the Income Tax authorities.

The monetary limit for quoting PAN for sale or purchase of immovable property has been raised to Rs.10 lakh from Rs.5 lakh. Properties valued by Stamp Valuation authority at amount exceeding Rs.10 lakh also need PAN.

REAL ESTATE INVESTMENT TRUST (REIT) 

1. Long-term capital gain (after holding for 1 year) from REIT units listed and traded in stock exchanges will be tax free

  1. Short-term capital gain from REIT units listed and traded in stock exchanges will be taxed at a lower rate of 15%
    3. REIT will be pass through vehicle and is not liable for any income received by it
    4. Rents received by REIT and distributed will be taxed at the hands of investors as rental income.
    5. Interest received by REIT and distributed will be taxed at the hands of investors as interest income
    6. Dividends received by REIT and distributed will be tax free in the hands of investors, after the REIT pays tax at fund levelNote :Securities Transaction Tax (STT) : STT is levied on stocks and equity mutual funds in lieu of tax-free dividends and also lower capital gain taxes. Equity mutual funds are defined as schemes that maintain more than 65% equity exposure and because of that, equity ..

equity oriented balance funds and arbitrage funds also comes under this category.

Dividend distribution tax (DDT) : The mutual fund dividends are tax-free, but there is a dividend distribution tax (DDT) applicable for debt mutual funds. The high DDT (works out to be 28.32% now) has taken the sheen out of the dividend options in debt mutual funds.
Indexation benefit: While computing long-term capital gain (LTCG), indexation benefit is provided as compensation against inflation. For example, if the LTCG is 10% p.a. and the inflation is 7% p.a., you need to pay tax only on 3% additional gains.

Indexation benefit is not available for instruments that have interest components.

Sneha Ramamurthy

Content Stratetigist – Dilzer Consultants Pvt Ltd

 

 

 

Credits

economictimes.indiatimes.com/articleshow/50415709.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst

https://www.relakhs.com/asset-classes-returns-tax-implications/

https://www.kotaksecurities.com/ksweb/faqs/Equity/exchange-traded-fund-faqs

https://economictimes.indiatimes.com/wealth/tax/how-to-choose-the-tax-saving-instrument-most-suitable-for-you-et-wealth-ratings/articleshow/56387699.cms