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How returns from various investment options are taxed?

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“The hardest thing to understand in the world is the ‘income tax’!” – Albert Einstein

When any investment generates returns, it feels great – and very quickly, that feeling vanishes when the word ‘tax’ gets associated with it. Understanding how various returns are taxed is as important while making investment decisions. Here are the various tax laws on various types of investments simplified for you:

EQUITY:

Stocks:

  1. If you hold on to them for a year, the long-term capital gain is tax free
    2. Short-term capital gain is taxed at 15%
    3. Dividend received by individual is already taxed through Dividend Distribution Tax (DDT), paid by the Company. Dividends are tax free in the hands of the investor. However, dividend income above Rs. 10 lacs will be subject to 10% tax.

DEBT FIXED INCOME INSTRUMENTS:

Savings a/c:

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

Fixed deposits:

  1. Full interest taxed at slab rate
    2. TDS of 10% if interest in any financial year crosses Rs. 10,000

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%
    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% if interest in any financial year crosses the Rs. 5,000
    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 (after holding for 1 year) is tax free
    2. Short-term capital gain is taxed at 15%
    3. Dividends are tax free

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

Equity oriented balanced funds:

  1. Long-term capital gain will be tax free
    2. Short-term capital gain taxed at 15%
    3. Dividends are tax free

Debt funds:

  1. Long-term capital gain (after holding for 3 years) is taxed at 20% after indexation
    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%

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%

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:

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

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 allowed
    4. Short-term capital gains taxed at marginal rates

REAL ESTATE:

  1. Rent received (or notional rent for the locked up second home) are taxed at slab rate
    2. Deductions available for rent includes property tax, repair costs, home insurance, etc.
    3. The long-term capital gain (after holding for 3 years) is taxed at 20% after indexation
    4. Short-term capital gain is taxed at the marginal rates.

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
    2. 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.

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 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.

NOTE: 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.

Please note that above given information is basic information on taxation. Investors are requested to consult their certified tax consultant or financial experts before taking decisions or actions.

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