The Most Authentic Guide on Personal Finance and Investments

Words of Wisdom : "The problem with the rat race is that even if you win, you’re still a rat." ~ Lilly Tomlin

Tax Planning on Investments

Usually people consider only the gross returns from an investment. They fail to account for the tax that they may have to pay on the same. Proper planning of investments can help to cut down this tax liability and thereby enhance the net post-tax returns. After all, what really matters is what finally comes into your pocket!

Generally speaking, you can earn 3 types of income from your investments.

Interest Income/Rental Income
Interest comes from investments such as PPF, NSC, Bank Savings A/c, Bank FD, Post Office Schemes etc. Rental income comes from property.

The income from the above investments is taxable — except PPF and Savings A/c (max Rs.10,000). The interest income (with no deductions) and rental income (after certain deductions) will be added to your total income and taxed as per your slab rates.  

Dividend Income
You could receive dividend from your investments in shares and mutual fund units.

When a company declares dividend, it has to deduct Dividend Distribution Tax (DDT) [@16.22%] and only the net amount is paid to the shareholder.

Similarly, MF companies too have to deduct DDT [@13.52%] and pay the net amount to the unit-holder. This, however, is applicable for non-equity funds only. [Since equity MFs already suffer DDT when they receive dividend from the companies, they need not again pay DDT when they distribute dividend to their investors.]

Capital Gains
When you sell your assets and make a profit, you have to be pay tax on these gains. Depending on the holding period, these gains are classified as either Long Term Capital Gains (LTCG) or Short Term Capital Gains (STCG)

Long Term Capital Gains Tax:  Sale of shares/equity MFs after 1 year [Nil tax]; debt MFs after 1 year [@10%/20% without/with indexation] or sale of property/gold after 3 years [@10%/20% without/with indexation].

Short Term Capital Gains Tax: Sale of shares/equity MFs within a year [@15.45%];  debt MFs within a year [as per your slab rate] or sale of property/gold within 3 years [as per your slab rate]

Given the foregoing, each one has the opportunity to structure his/her investments in such a manner that minimizes the tax outgo and thus maximize the returns.

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