How India Tax Investments in 2021 ★ 23 most common Investments Explained

Taxation plays a very important role in the returns generated by your investment and so you should know how India tax investments before you choose one. We list down the most common investments and how they are taxed?

Fixed Income/Debt Investments

Saving Bank Account

• Interest earned in Saving bank account up to Rs 10,000 is exempted from tax u/s 80TTA. Any interest more than Rs 10,000 is added to your income and taxed at income tax slab rates.
• Senior citizen can claim tax exemption up to Rs 50,000 on interest income from bank/ post office fixed deposit, recurring deposit or savings account up to Rs 50,000 u/s 80TTB (applicable from April 1, 2018)
• There is NO TDS on interest earned on saving bank account.
• This is also applicable for Post Office Savings Account.

Bank Fixed Deposits

• The entire interest earned on Bank FD is added to the income and taxed according to the income tax slab rates.
• However from FY 2018-19 interest income received from Bank/post office FD/RD is tax exempt up to Rs 50,000 under new Section 80TTB.
• TDS of 10% is deducted if the annual interest exceeds Rs 40,000  (changed in Budget 2019) and Rs 50,000 in case of senior citizens. Interest across all Fixed Deposit/ Recurring Deposit accounts across all branches of a bank is taken into consideration to arrive at the total annual interest figure for TDA.
• If NO PAN is linked to the FD account the TDS rate is 20%.

Bank Recurring Deposits

• Budget 2015 made the tax and TDS structure for Recurring Deposit same as Fixed Deposit.
• Earlier no TDS was deducted for RD deposits.

Company Fixed/Recurring Deposit

• The entire interest earned is added to the income and taxed according to the income tax slab rates.
• TDS of 10% is deducted if the annual interest exceeds Rs 5,000.

NCDs/ Bonds

• The interest earned on bonds/NCDs is fully taxable as per income tax slab rate.
• TDS of 10% is deducted if the annual interest paid exceeds Rs 5,000. However, there is NO TDS if the bond/NCD is held in Demat form.

Capital Gains Tax on Bonds:

• In case the bond/NCD is sold through exchange before maturity, it entails capital gains. If the holding period is less than 1 year, it is Short Term Capital Gains and taxed according to income tax slab.
• For holding period of more than 1 year, the gains are Long Term Capital Gains and are taxed at flat rate of 10%. There is no indexation benefit available.

Tax Free Bonds

• As the name suggests the interest earned on tax free bonds is tax free.
• But if tax free bonds are sold before maturity, it leads to capital gains.
• Investment for less than 1 Year -> Short Term Capital Gains -> taxed according to income tax slab
• Investment for more than 1 Year -> Long Term Capital Gains -> flat rate of 10% (no indexation benefit)

Tax Investments – Small Saving Schemes

Post Office Saving Account

• Interest up to Rs 3,500 for single holder account and up to Rs 7,000 for joint account in Post Office Saving Account is tax free u/s 10(15)(i). The remainder interest will get added to your income and will be taxed at the applicable rate of income-tax.
• There is NO TDS on Post Office Saving Account.
• Also this exemption is over and above tax exemption offered by 80TTA.

Example: You have Rs 9,000 interest from Bank account and Rs 5,000 from Post Office Saving Account; you can claim Rs 3,500 tax exemption u/s 10(15)(i) for post office account and Rs 9,000 for bank account & Rs 1,000 for Post office account (total – Rs 10,000) u/s 80TTA separately.

PPF (Public Provident Fund)

• The interest received is tax free

Senior Citizen Saving Scheme

• The interest received is added to income and taxed at marginal income tax rates.

NSC/KVP

• The interest received is added to income and taxed at marginal income tax rates.
• There is NO TDS.

Tax Investments – Retirement Plans

NPS

• 40% of corpus should be used to buy annuity. The monthly pay out received is fully taxable.
• Remaining 60% of the maturity corpus is tax free (effective April 1, 2019)

Pension Plans

• 1/3 of pension maturity amount can be commuted (withdrawn in lumpsum) and is tax free
• The rest 2/3 amount should be used to buy annuity. The monthly pay out received from annuity is fully taxable

EPF (Employee Provident Fund)

• Maturity amount received form EPF is fully tax free if you have continuous service of more than 5 years.
• In case the service period is less than 5 years, the amount is taxable as per income tax slab rates.
• TDS at 10% is deducted for premature and taxable withdrawal of funds from EPS, if the payment is more than Rs 50,000.
• In case the PAN information is not furnished the TDS would be deducted as 20%.

Tax Investments – Mutual Funds

For tax purpose Mutual Funds are of two types:

1. Equity Mutual Fund and
2. Non-Equity Mutual Fund.

Any scheme which has more than 65% invested in equities is treated as Equity Mutual Fund.

Equity Mutual Fund/Equity Oriented Balanced Fund/Arbitrage Fund

• If the investment is held for more than 1 year, the gains are classified as Long Term Capital Gains and are taxed at 10.4% (changed in Budget 2018 and effective from April 1, 2018).
• In case the investment duration is for less than 1 year, the gains are Short Term Capital Gains which are taxed at the rate of 15.6%.
• Dividends are taxed at the income tax slab rate

Debt Mutual Fund/ Balanced Fund/MIP/ Gold Fund/ International FoF

• If the investment is held for more than 3 years the gains are classified as Long Term Capital Gains and are taxed at 20% after indexation.
• Short Term Capital Gains are added to the income and taxed at marginal tax rates.
• Dividends are taxed at the income tax slab rate

Equity

• If the investment is held for more than 1 year, the gains are classified as Long Term Capital Gains and are taxed at 10.4% (changed in Budget 2018 and effective from April 1, 2018).
• In case the investment duration is for less than 1 year, the gains are Short Term Capital Gains which are taxed at the rate of 15.6%.
• Dividends are taxed at the income tax slab rate

Tax Investments – Gold

Gold Jewelry/ Bullion/ Physical Gold

• If the investment is held for more than 3 years the gains are classified as Long Term Capital Gains and are taxed at 20% after indexation.
• Short Term Capital Gains are added to the income and taxed at marginal tax rates.

Sovereign Gold Bonds

• Interest received on sovereign gold bonds is taxed at income tax marginal rates applicable to you
• If bonds are held till maturity, the capital gains are tax free
• If the investment is held for more than 3 years but before sold maturity the gains are classified as Long Term Capital Gains and are taxed at 20% after indexation.Short Term Capital Gains are added to the income and taxed at marginal tax rates.

Gold Monetization Scheme

• The interest received is tax free.
• Also there is No Capital Gains Tax on the appreciation in the value of gold deposited.

Tax Investments – Life Insurance

Endowment/Money back Policies

• The final proceeds are tax free if the premium paid for all the years are less than 10% of the maturity amount.
• Surrender amount exempt from tax after 3 years
• TDS at 2% if the total receipts exceed Rs 1 Lakh.
• Service tax is applicable on premiums paid.

ULIPs

• The maturity amount is tax free if the premium paid is less than Rs 2.5 lakhs every year
• However if the premium paid is more than Rs 2.5 lakhs per year, its taxed the same way as equity mutual funds [Budget 2021]
• Surrender amount, early partial withdrawals exempt from tax after 5 years
• TDS at 2% if the total receipts exceed Rs 1 Lakh.

Tax Investments – Real Estate

Rental Income

• A standard deduction of 30% is allowed on rental income. Thereafter the rent received is taxed at income tax slabs applicable to you.
• You can also claim deduction for interest paid on home loan. There is no limit of interest deduction for rented home. Budget 2017 has limited the deduction to Rs 2 lakhs irrespective of property being rented or self-occupied.
• Additional deduction can be availed for repairs, home insurance, property tax, etc.

Sell/Purchase of Property

• The gains are long term capital gains if the property is held for more than 2 years [Budget 2017 brought the holding time to 2 years]. In this case it’s taxed at 20% after indexation benefit.
• Tax payers can now buy two houses on sale of 1 house if the capital gains are less than Rs 2 crore. This benefit can be availed only once in lifetime. (proposed in Budget 2019)
• Short term capital gains is taxed at marginal tax rate applicable to you.