Returns from investments are counted as income and thus are taxable. However, each scheme is taxed differently. Thus, Here’s a look at their effectiveness in saving taxes.
Returns from investments are a form of income. Where there is income, taxes may need to be paid. But every investment is created differently and therefore taxed differently. In any ordinary portfolio, there may be at least 3-4 different asset classes. Each of them may have its own unique set of taxation rules. How do you know how much tax you need to pay on any investment? Let’s look at some popular investments and how their returns are taxed.
PPF, SUKANYA SAMRIDDHI SCHEME
PPF and SSS are two great investments for risk-averse investors because the whole investment is completely tax-free. They are called triple-exempt investments because they need you to pay no taxes in all three stages of investment: investment, accumulation, and withdrawal. Today, the promised rate of return on PPF is 8 per cent while the SSS pays 8.50 per cent, and you get full value for your return. Tax Efficiency & Returns Rating: 5/5
EQUITY
Equity investments (both equity mutual fund, or direct equity) are taxed based on whether they are short-term or long-term. An equity investment becomes long-term in one year. Long term capital gains above Rs 1 lakh in a financial year from equity are taxed at 10.4 per cent. Short term capital gains from equity are taxed at 15.6 per cent. Tax Efficiency & Returns Rating: 5/5
DEBT MUTUAL FUND, GOLD, TAX-FREE BONDS
These three asset classes are taxed in a similar manner with minor variations. All three assets become long term in three years. Long term capital gains from them are taxed at 20.8 per cent with indexation benefits. Short term capital gains are taxed as per the investor’s tax slab. Tax Efficiency & Returns Rating: 4/5
REAL ESTATE
Returns from real estate classify as long term in two years. Long term capital gains are taxed at 20.8 per cent with indexation benefits. Short term gains are taxed as per slab rate. Since property costs and capital gains may be high, selling them as long term assets provides the seller indexation benefits, which can significantly lower the tax on such gains. Tax Efficiency & Returns Rating: 4/5
NSC, SENIOR CITIZENS SAVINGS SCHEME, POST OFFICE DEPOSITS
Here, all interest returns are taxable as per the slab rate. However, the five-year NSC offers marginal advantages over the fixed deposits since the interest generated is tax-exempt during accumulation stage. The interest in NSC is also reinvested thereby providing additional benefits under Section 80C. The interest is taxed only on maturity. Tax Efficiency & Returns Rating: 3/5 for regular investors; 3.5/5 for senior citizens.
FIXED DEPOSITS
Interest from fixed deposits is fully taxable, which makes this much-loved investment very tax-inefficient. However, if you are a senior citizen, interest up to Rs 50,000 in a financial year from all fixed and recurring deposits is exempt from tax under Section 80TTB. Above this limit, the interest earned is taxable as per the investor’s slab. Tax Efficiency & Returns Rating: 2.5/5 for regular investors; 3.5/5 for senior citizens.
SAVINGS ACCOUNT
Your savings bank account provides you interest periodically. This income needs to be declared under Income From Other Sources. Under Section 80TTA of the Income Tax Act, interest up to Rs 10,000 in a financial year from all your savings accounts with banks or post offices is exempt from taxation. If you have earned more than Rs 10,000, you will get an exemption only on Rs 10,000.
Tax Efficiency & Returns Rating: 3/5
LIFE INSURANCE PROCEEDS
Proceeds – whether through policy maturity or surrender – from ULIPs, endowment plans, cashback plans and similar investment-linked life insurance are tax-free in hands of the investor, subject to limits defined in Section 10(10D). Despite the high tax efficiency, high charges on these products lead to low returns, especially in the case of premature surrender. Tax Efficiency & Returns Rating: 2/5
