As an investor it is imperative that you understand the different asset classes and its varied tax implications. It is true that every financial advisor you approach would talk about diversifying your investment portfolio and allocating your assets to a variety of asset classes depending on your risk profile and your short and long term financial goals.
- That’s enough of jargon talk. We’ll cut the finance babble and get to the point. First things first. Do you know how much you are taxed on your investments? Taxes make a big difference on your net returns. Each asset or investment is taxed differently with specific limits. By ‘Asset class’ we mean Stock, Mutual Funds, Bonds, Real Estate Gold, etc.,
Each of these assets are taxed differently with respect to its nature, the value and the period of holding. Find below the different asset classes for an easy understanding.
So let’s pick the first and the favorite of the risk taking investor.
Simple rule : Taxed, if you realize the capital gain in less than 12 months, and zero tax if the capital gain is realized after a year. And it’s a 15% flat tax on the capital gain realized before 12 months. So all the traders who scurry and flurry along with the market ups and downs everyday, must make enough to beat taxes. Yep.. and there’s one more on the list; you are charged 0.1% as securities transaction tax on the value of every transaction you make.
Pat yourself on the back , if you been earning dividends from that blue chip stock you love to hold, because dividends are not taxable at the hands of the investor. But you must be a hot shot if your dividend exceeds 10 lakhs annually. In that case, you will pay a 10% tax from 2016.
Here again, the finance gurus love classifications. Equity and non – equity mutual funds.
Equity Mutual funds : ELSS, Equity based Mutual Funds, and Arbitrage funds come under this category. Same as stocks. You are taxed 15% when you realize the gain in less than a year. Pay NIL tax if you have been holding the Equity fund for more than a year, as it becomes a long term capital gain.
Non – Equity Mutual Funds: Fixed Maturity Plans (FMPs) , Monthly Income Plans (MIPs) , Debt Funds, Fund of Funds (FoFs) , Debt oriented or balance funds, all come under this classification. Here, a long term capital gain is when you have held the mutual fund for more than 3 years. Any gain before the three year period of holding the fund is treated as a short term capital gain.
All debt funds and non – equity mutual fund long term gains are taxed as per the individual’s income tax slab rate. Short terms gains are taxed at 20%.
Gold ETFs : Electronically traded Gold funds are also treated as non – equity mutual funds and are taxed as per your income slab. The same goes for gains from the selling of physical gold.
Gold Bonds: Any interest paid on gold bonds come under the taxable head of your income and the long term capital gains from gold bonds are exempt from tax when you redeem them.
So here comes the biggie and the one that everybody is interested in – Gains from real estate. Short term capital gains are when you have been holding the real estate for less than 36 months and they become a part of your taxable income.
A long term capital gain is when you have held the property for 3 years or more and the proceeds are taxable. You pay a 20% tax on the same.
Also Read | Should you buy physical gold or gold ETFs?
Rental income would come under taxable income and you would be taxed as per your income tax slab. Buyers have to pay a 10% TDS on properties which are of a value of 50 lacs or more.
All properties that exceed an amount of 10 lacs must have a valid PAN number and the registrar of properties needs to report the sale of any immovable property that exceeds the value of 30 lacs to the income tax authorities.
Tax free Bonds
As the name suggests, this one comes free of a TDS. And the interest received on a Tax free Bond is also tax free. A short term capital gain would mean a sale within 12 months of holding the bond and this would become taxable income with tax payable as per your income slab.
Hold the TFB for more than 12 months, and proceeds of the sale would become a Long term capital gain on which you pay a 10% without indexation.
Non – convertible Debentures
No TDS . If the interest earned if exceeds INR 5000/- per annum it will become a taxable income and you will pay tax according your income tax slab.
Short term capital gains tax is applicable if you sell Debentures before the end of one year from the date of purchase. The income becomes taxable as per your tax slab.
Long term capital gain on NCD is when you sell after a period of one year. Pay 10% as tax without indexation.
It is however, advisable to consult a financial advisor as taxation plays a tricky role in arriving at your net returns.
Fixed and Recurring Deposits
All interest earned from Fixed and Recurring Deposit are taxable. There is no TDS for interest income that is less than 10,000/- . However, it is important that you to furnish your PAN number if have an FD or RD with the bank. Else, the bank can deduct 20% TDS instead of 10 %.
Company Fixed Deposits:
No TDS for interest earned up to INR 5000/- per annum. This becomes taxable under the head ‘Income from other sources’ and you are required to pay tax as per the tax slab you fall into.
Life Insurance should not be mixed with Investments and buying an Insurance for the purpose of tax saving is a wrong approach to investment.
Almost all insurance products are front loaded. Surrendering a policy in the initial years will not only have you forego the tax benefit, but have you take a hit on the returns as well. The plain vanilla Life Insurance settlement that is paid to the family member in the event of your death is not taxable under Sec 10 of the Income Tax act.
A ULIP (Unit Linked Investment Policy) is tax free. Surrendering the ULIP before paying premium for 5 years, will have the surrendered value added to your total income for taxation purposes. Nil taxability if the ULIP is surrendered after.
Picking up a tax- efficient investment option or a basket of them has a lot to do with the intelligence and expertise of your financial consultant. Quite a few of the above mentioned asset classes will need complete a work out on the tax liability which is best left to the financial advisor. As an investor your main focus would be to rightly understand your net returns after the tax liability.
This article has been contributed by Right Horizons