When it comes to taxes a common person always tries to either evade this topic or thinks about making the last minute investment in the February and March just when your employer asks for investment proofs. That’s it chapter closed. Thank you.
Yes, I do agree that Income Tax is a complex subject and a dreaded one for many. The intent of writing this short paragraph is to familiarise you with the taxation aspects of only that income (or losses) that you may have from your investments, and the ways and means available to use your investments to reduce the amount of tax you have to pay. However, I would still suggest that you better consult a tax advisor in this regard.
Paying Taxes on Investments
Mutual funds and stocks are capital assets, and gains from the purchase and sale of these instruments is called capital gains. If you lose money on them, then these are called as capital losses. Please do remember that Capital gains or losses occur only when you actually sell an investment. Another aspect is the dividends paid by fund houses or shares is called as dividend income, while any interest earned from a bank/post office or other such deposits is called the interest income
Now let us understand the Taxes and their treatment.
Capital gains tax on mutual funds
Non-equity funds are treated as a long-term capital asset if held for more than three years. Long-term capital gains tax is payable at 20 per cent with indexation benefit on the realised gains.
Gains on investments in non-equity funds held for up to three years are added to income and taxed as per the applicable slab rate.
Equity funds are treated as a long-term capital asset if held for more than 1 year. The long-term gains are taxed at 10 per cent without indexation. Short term capital gains from equity funds are taxed at 15 per cent.
Let us understand this further: – Suppose you have made an investment in a non-equity fund, in the year 2006-07 for Rs 1 lakh and sold it for Rs 5 lakh in 2018-19. So in mathematical terms you made a gain of 4 Lakh. But , when it comes to your capital gains taxation it will be adjusted for the inflation adjustment factor i.e. 280 divided by 122, which is 2.29. By this method, your cost of the investment will be deemed to be higher by 2.29 times than what it actually was, that is, it will be Rs 2.29 lakh. Thus, your profit will be Rs 2.71 lakh and the tax payable will be Rs 54,200.
Interest Income:-
Interest income is simply added to your income and taxed according to whatever tax bracket you are in.
Saving Taxes through Section 80c I am categorically keeping this topic away from this discussion for now and will be shared in Series 2.
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