Filing income tax return? Here’s a ready reckoner about how returns on investments made in shares, mutual funds, FDs, gold and real estate are taxed.
Before you finalize your income tax returns (ITRs) for FY2018-19 or AY2019-20, it is important to calculate your tax liability after considering all your income and tax-saving steps. Income earned from investments often constitutes a significant portion of your total income during the relevant financial year. However, the tax applicable to each investment may not be the same. So, you should be aware of the taxes applicable to various types of investments in terms of their class, period of investment and other aspects.
Here we have listed out some popular investment instruments and ways they are taxed to make things easier for you when you file your Income Tax Return.
Investment in shares
The gain from investments in shares held for more than 1 year is called Long Term Capital Gains (LTCG), whereas if the stock is held for less than 1 year, it is called Short Term Capital Gains (STCG). The LTCG on shares is tax-free provided the total gain is less than the threshold of Rs 1 lakh in a financial year. If the LTCG is more than the threshold, the gains above that limit are taxed at a 10% rate. On the other hand, the STCG on shares is taxed at a 15% rate.
You may also earn dividends from your investments in shares. The dividend income from stocks is not taxable in the hand of the investor up to a limit of Rs 10 lakh in a financial year.
Investment in Mutual Funds
For taxation purpose, a mutual fund investment is classified into two categories – equity-oriented mutual funds and debt mutual funds. Equity mutual fund investments are taxed similar to stock investments, i.e., the LTCG is tax-free below Rs 1 lakh. And above this limit, it is taxed at a 10% rate. Similarly, the STCG is taxed at a 15% rate.
However, in the case of debt fund investments, the gains after a holding period of more than 3 years are considered as LTCG, whereas gains after a holding period of less than 3 years are considered as STCG. The LTCG on debt funds is taxed at a 20% rate with indexation benefit which helps reduce the tax incidence by providing an inflation-adjusted purchase price for your fund units. On the other hand, the STCG on debt mutual fund is taxed according to the investor’s applicable income tax slab rate.
Do note that if you are investing in a mutual fund through the Systematic Investment Plan (SIP) mode, then every instalment is considered as a new investment and is taxed separately on the basis of the holding period and nature of the fund in the same way as equity and debt funds.
That being said, the Equity-Linked Saving Schemes (ELSS) investments come with a lock-in period of 3 years and investors get a tax deduction on them u/s 80C. Because of the lock-in, all ELSS gains automatically become LTCG.
Investment in Fixed Deposits
Interest earned from fixed deposit investments is taxed as per the investor’s applicable income tax slab rate. However, interest income of up to Rs 50,000 in a financial year is tax-free for senior citizen depositors.
It would be worthwhile to point out that there are a number of tax-saving fixed deposits available in the market that come with a lock-in period of 5 years which allow tax deduction benefits u/s 80C.
Investment in Gold
Investment in gold is taxed similar to a debt fund. The gains on investments with a holding period of more than 3 years are considered as LTCG and those with a holding period of less than 3 years are considered as STCG. The LTCG on gold is taxed at a 20% rate with indexation benefit, whereas the STCG is taxed according to the investor’s applicable income tax slab rate.
If you have invested in Sovereign Gold Bonds (SGB) and have redeemed them on maturity, the entire capital gain is exempt from tax. SGB investments also allow interest income on a regular interval, which is taxed at the slab rate applicable to the investor.
Investment in Real Estate
Gain on selling an immovable property after holding it for more than 2 years is deemed as LTCG, whereas gain after a holding period of less than 2 years is regarded as STCG. The LTCG on real estate is taxed at a 20% rate after factoring-in the indexation benefit, while the STCG on real estate is taxed at the applicable slab rate.
So, if you have invested in any of the above-mentioned instruments, you’ll be well-advised to calculate the applicable tax on your returns. If you have invested in any other instrument which is not mentioned here, or you have any other doubt, don’t hesitate in consulting a tax advisor before taking any decision.
(The writer is CEO, Bankbazaar.com)