Like your salary or business income, your investment returns are taxable as well

Most of our income and expenses are subject to tax. It is useful to be aware in what manner and at what rate your investment re­turns are taxable. People look for tax efficiency. It improves your net-of-tax take-home returns. However, you should not make tax efficiency the basis of your investment decisions. The reason is, if that be the basis of your de­cisions, then you are de­viating from what is suitable for you. The criteria should be your investment objectives, cash flow re­quirements, investment horizon, risk appetite, and what is appropriate for your requirements.

Bank deposits

The most basic form of in­vestments is bank depo­sits. The interest on depo­sits is taxable under the head ‘income from other sources’ at your marginal slab rate. If you are in the higher tax bracket, then this income is taxable at 30%, plus surcharge and cess as applicable. If you are in a lower tax bracket, then tax is accordingly lower. If your interest on deposits in one bank is more than ?40,000 in a financial year, then there is tax deducted at source (TDS).

The TDS rate is 10%, and you have to pay the ba­lance tax, as per your slab. The information about the TDS will reflect in what was Form 26AS earlier, now annual information statement (AIS).

Mutual funds

Mutual funds are a popular investment vehicle for ma­ny people. Taxation of MFs depends on the option you have chosen. There is a di­vidend option, now known as income distribution- cum-capital withdrawal (IDCW) option. In this op­tion, the MF pays out divi­dends and the net asset va­lue (NAV) dips to the extent of payout.

These payouts are taxa­ble in your hands at your marginal slab rate. There is TDS beyond ?5,000 of IDCW (dividend) received in a year from MFs, at 10%, and you haw to pay the re­maining tax, as per your applicable slab rate. The other option in MFs is growth, where there is no payout; the earnings of the fund remain in the NAV. You can redeem when you want, at the prevailing NAV and encase your returns. The taxability of MFs in the growth option depends on the underlying invest­ments, which are equity and debt. In debt funds, re­turns are taxable as short­ term capital gains, which again is at your marginal slab rate. In the growth op­tion of equity-oriented funds, it is about your pe­riod of holding. Short-term holding period is defined as one year and long term is defined as more than one year. Short term capi­tal gains are taxable at 15%, plus surcharge and cess as applicable. Long-term cap­ital gains, from equity stocks and equity-oriented MFs, are exempt from tax up to ?1 lakh per financial year. Beyond ?1 lakh, equi­ty-oriented MFs are taxa­ble at 10% plus surcharge and cess as applicable.

Equity stocks

Investing in equity stocks has a long history in India. Taxation of the gains are si­milar to equity MFs dis­cussed earlier. If you sell the shares within one year of purchase, it is short­term capital gains, taxable at 15% plus surcharge and cess. Long-term capital gains beyond U lakh per fi­nancial year are taxable at 10% plus surcharge and cess. Investing in bonds or debentures is gradually gaining ground.

The coupon (interest) on bonds/debentures is taxable in your hands at your marginal slab rate. From this financial year, there is TDS on the coupon on bond*;. Capital gains from bonds will happen if you sell the bond prior to maturity, at a profit. For bonds listed at the Exchange, a holding pe­riod of more than one year is de­fined as long term. You should not make tax efficiency the basis of your investment decisions

cadency on a holding period of one year and longer. The crux of your allocation to equity is your risk appetite and investment horizon.

The longer the better, as it takes care of market cy­cles. In the interim, there will be fluctuations in the market and in your portfo­lio holding statements. As long as you have a long enough horizon, say 10 years, history shows that you will get decent returns on top of it, you get tax effi­ciency.

Source: https://www.thehindubusinessline.com/portfolio/personal-finance/know-the-taxability-of-your-investment-returns/article67167462.ece