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What is Tax on Investments?

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What is Tax on Investments?

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On the long road to achieving our financial goals we encounter multiple tolls in the form of tax on investments. And if you ignore these taxes while making your financial plan, you’ll be in for a rude surprise.

For instance, you have different financial goals like purchasing a car or planning for emergencies and retirement. These goals have different risk and return expectations and hence different investment options. But along with these, there can be differences in the tax impact on investment decisions you make for them. 

To understand what the tax on investment income is from different securities in India, let’s focus on how different investments are categorised for taxation. 

What are the different types of investment categories in India? 

1) Immovable assets 

These can be commercial or residential real estate assets. You might have different ways of possessing real estate. One is by purchasing it and another by getting it through inheritance or as a gift from family members. 

In both these cases, your taxable profit depends on when you sell the property. If you sell this asset within two years or less, short-term capital gains (STCG) tax would be applicable. Similarly, for an investment tenure of more than two years, you will have to pay long-term capital gains (LTCG) tax. Now, if you hold these assets for a longer time (more than two years), you can get tax exemption, deductibles and indexation benefits on your gains from them. Most of these tax exemptions are based on reinvesting the capital gains within a certain period. 

2) Commodities like gold and silver 

One of the hassles in holding physical gold apart from storage and security is the applicable short-term and long-term capital gains tax on their profits. Most of us hold some amount of gold with the belief that it provides financial security during emergencies. But are you aware of the applicable taxes on capital gains on selling these assets?. These taxes depend on whether we have held these assets for less than 36 months or more. 

Again, just like real estate, you can get indexation benefits if you stay invested for the long term. Indexation benefits consider the impact of inflation on your capital gains. Expenses like brokerage charges are also deductible from your profits. 

Another commodity is silver. You can invest in them virtually through silver Exchange Traded Funds (ETFs). These ETFs are taxed just like debt assets. If you redeem them after three years or a lesser holding period, their gains will be added to your income and taxed accordingly. If you hold them for more than three years, a flat 20 per cent LTCG tax rate will apply to your profit. 

Did you know that you can invest in gold digitally? You can make these investments with gold ETFs and other gold mutual funds. The Fi money app offers extensive research on these and many other investments to help you add the right virtual gold investment to your portfolio. 

3) Listed stocks 

When you invest in equities of a listed company, unlike real estate and physical gold, long-term capital gains apply for a shorter period of 12 months. Similarly, if you hold these funds for less than a year, STCG tax will be applicable on your returns. 

4) Mutual funds 

The tax implications on mutual funds depend on their underlying assets. For example, if it is a debt mutual fund, STCG tax would apply on holding it for 36 months or less. Similarly, if they are held for more than 36 months, you will incur LTCG tax on their profits. 

For equity mutual funds, the application period for the long-term capital gains comes sooner than their debt counterparts. So, if you have redeemed these assets after 12 months of holding them, LTCG tax would apply. Similarly, for a period lesser than that, STCG would be applicable. 

For both these mutual fund types, you can avail of tax benefits from exemptions and indexation if you stay invested for the long term. 

What is the tax on investment income from these assets? 

Based on the investment types discussed above, the tax rates differ for different investment tenures. 

These tax rates are as follows: 

1. Short-term Capital Gains are taxed as follows:

2. Long-term Capital Gains are taxed as follows:

When are taxes on investments calculated? 

Whether STCG or LTCG, tax implications are calculated only on the redemption of securities. These taxes are based on the period for which you have held them. 

What is an investment rebate on income tax? 

With tax-saving investments, you can reduce your tax liability. You can save taxes up to ₹1.5 lakh by investing in different tax-saving instruments. These instruments are Equity Linked Savings Scheme (ELSS), Public Provident Fund (PPF), five-year fixed deposits and National Savings Certificate (NSC). These investments can help you get an investment rebate on your income tax as per Section 80C of the Income Tax Act. 

However, returns from some of these investments also incur an LTCG tax. These are investments like ELSS, fixed deposits and NSC. For ELSS, after maturity, LTCG tax would be applicable on profits. For fixed deposits and NSC, the returns get added to your income and are taxed as per your tax slab.

To sum up 

Taxes come in all shapes and sizes. They are different for different investments and time horizons. There are different deductibles, exemptions and indexation benefits. There are investment rebates that can help you save taxes on your profits, but taxes further apply to gains from some of these investments too. Your tax planning needs to be comprehensive to match different investments and income. 

Frequently asked questions 

1. How much tax do you have to pay on investments?

Taxes on investments can be broadly divided into long term and short term capital gain taxes. The rate and application period for these taxes differ from one security to another. 

Apart from tax proportion, you can consider benefits through indexation, deductibles and exemptions for investments. These aspects, too, are different for different asset classes. 

2. Do you pay taxes when you sell stock?

Yes, there are applicable taxes on the sale of stocks. These taxes depend on your holding period. For example, if you have held these investments for one year or less, an STCG tax of 15 per cent plus cess and surcharge would be applicable.

Similarly, if you have held them for more than a year, an LTCG tax of 10 per cent would apply on profit above ₹1 lakh. 

3. Do I pay taxes on stocks I don't sell? 

No taxes are applicable on accrued gains. You pay taxes only on the redemption of investments. 

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