The Most Authentic Guide on Personal Finance and Investments


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Tax On Your Investments: Simple Brief Quick Recap

Most people give undue focus to the tax on salary income. In the process, they ignore the tax on their investment income. This is bad.

Because: Often the tax outflow on their investments, far exceed the tax on salary. Hence, much more tax savings are possible on the investment side, rather than the salary side.

Returns on All Investments and in All Forms — whether as Interest, Capital Appreciation, Dividend or Rent — are almost always taxable (except a few exceptions).

Presented below, is a brief and simple summary, of the tax payable on your most common investments (pertaining to Financial Year 2016-17). You MUST use this information to restructure your investments, and slash the tax liability on your investment income.

1. Savings Account
- Up to Rs.10,000 interest per year is exempt from tax
- Savings interest exceeding Rs.10,000 is taxed as per your income tax slab rate
- No TDS is deducted on the Savings Account interest

2. Fixed Deposits (Bank, Post-Office or Company)
- Every rupee of FD interest is taxable, as per your slab rate
- If the FD interest income from a Bank / Post Office exceeds Rs.10,000, TDS @10% is deducted
- If the FD interest income from a Company exceeds Rs.5,000, TDS @10% is deducted

3. Recurring Deposits
- Same as Fixed Deposits

4. Tax-Free Bonds
- Interest income is fully exempt from tax, without any limit
- If sold after 1-year of holding period (Long Term Capital Gains), tax on capital gains is 10% [not eligible for any indexation benefit]
- If sold in less than a year (Short Term Capital Gains), entire capital gains is taxed as per your slab rate

5. Other Bonds and Debentures
- Interest income is fully taxable, as per your slab rate
- TDS @10% is deducted if the interest income exceeds Rs.5000 (not applicable for listed bonds / debentures in demat form)
- If sold after 1-year of holding period, tax on capital gains is 10% [not eligible for any indexation benefit]
- If sold in less than a year, entire capital gains is taxed as per your slab rate

6. Public Provident Fund
- Interest income is fully exempt from tax

7. Gold (Bullion and Jewellery)
- Capital appreciation is taxed @20% with indexation benefit, when the holding period exceeds 3 years
- If sold within 3 years, the capital gains are taxed as per your slab rate

8. Gold ETF
- Same as physical gold above

9. Sovereign Gold Bonds
- Interest on sovereign gold bonds is fully taxable, as per your slab rate
- If the bonds are held till maturity, entire capital gains is exempt from tax
- If sold before maturity after 3 years holding period, the gains are taxed @20% with indexation benefit
- If sold before maturity in less than 3 years, the gains are taxed as per your slab rate

10. Endowment / Moneyback Insurance Policies
- Maturity amount fully exempt from tax (provided the premium does not exceed 10% of the Sum Assured)
- Surrender amount exempt from tax after 3 years

11. Unit Linked Insurance Plans (ULIPs)
- Maturity amount fully exempt from tax (provided the premium does not exceed 10% of the Sum Assured)
- Early withdrawals, either in part to full, exempt from tax after 5 years

12. Property
- Rental income (including notional rent), after specified deductions, is taxable as per your slab rate [specified deductions include Standard Deduction (30%), Municipal Taxes and Home Loan Interest upto prescribed limits]
- If sold after 3 years holding period, the gains are taxed @20% with indexation benefit
- If sold in less than 3 years, the gains are fully taxed as per your slab rate
  
13. Equity Shares
- If sold after 1 year, capital gains exempt from tax without any limit
- If sold in less than a year, entire capital gains are taxed @15%
- While there is no direct tax payable by you on Dividend, there is an indirect Dividend Distribution Tax (DDT) which companies have to deduct @25% before paying you dividend. (So, contrary to popular misconception, dividends are not tax-free)
- In addition to DDT you have to pay 10% tax on dividend income exceeding Rs.10 lakhs

14. Equity Mutual Funds
- If sold after 1 year, capital gains exempt from tax without any limit
- If sold in less than a year, entire capital gains are taxed @15%
- Dividends too are tax exempt. Unlike Direct Equity, there is no DDT on equity MFs. (This is because dividend received by MFs, from its investments, is already DDT-paid)
- However, like direct equity, you have to pay 10% tax on dividend income exceeding Rs.10 lakhs

15. Balanced Mutual Funds
- Same as Equity Funds above

16. Arbitrage Funds
- Same as Equity Funds above

17. Debt Mutual Funds
- If sold after 3 years holding period, the gains are taxed @20% with indexation benefit
- If sold in less than 3 years, the gains are fully taxed as per your slab rate
- Just like companies, MFs have to deduct 25% Dividend Distribution Tax (DDT) before paying you dividend (i.e. dividends on debt MFs are not tax free)

18. MIP Mutual Funds
- Same as Debt Funds above

19. Gold Mutual funds
- Same as Debt Funds above

20. Pension
- 1/3rd of total corpus can be commuted on maturity and is exempt from tax
- With balance 2/3rd amount it is mandatory to buy Annuity plan, monthly payout of which is fully taxable as per your slab rate

21. National Pension Scheme (NPS)
- 60% amount can be withdrawn on maturity, of which 40% is tax exempt and balance 20% is taxed as per your slab rate 
- With balance 40% amount it is mandatory to buy Annuity plan, monthly payout of which is fully taxable as per your slab rate

Now that you have refreshed your memory and knowledge, on the tax liability on your various investments, immediately go in for the necessary course correction... 
... and thereby, increase your in-hand investment income after taxes.

[Note: The impact of Surcharge and Cess is additional, as and where applicable. For simplicity I have ignored the same, as it will not impact your decision to restructure or not.]

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