Saturday, September 1, 2012

Investment Tax

How are your investments taxed

All financial instruments go through three stages -- Investment, Earning and Withdrawal. Since the tax rules vary across these phases, find  out how much tax you will have to pay on your investment.
  • PF & VPF  - This is the most common investment. The interest rates are decided by EPFO Trust. 
  • PPF - This assured return scheme is market linked, with 1 lakh annual investment limit. 
  • Insurance Policies - Budget 2012 says that for tax benefits, the cover should be 10 times the annual premium. 
  • ELSS funds - TAx-saver with the shortest lock-in period of three years may get scrapped under the DTC.
The Exempt-Exempt-Exempt model means all three stages are tax-free. You get tax deduction at the time of investment, the earnings are tax-free, as are the withdrawals.
  • Unit linked pension plans - Upto 33% of the pension corpus withdrawn on maturity is tax-free. Rest to be put in annuity. 
  • Pension policies - Annuity income is taxable as income at the normal rate applicable to the investor. 
  • NPS - Launched with much fanfare, it has not done too well. May be overhauled and improved soon.
The Exempt-Exempt-Tax regime gives tax deduction at the time of investment and the earning is tax-free, but withdrawal is taxed as income at marginal rate.
  • NSCs - These are now market linked like the PPF and available in 5 and 10 years options.
  • Tax-savings FDs - Best tax saving option for risk averse investors. Higher rates for senior citizens.
  • Senior Citizens Savings Scheme - A popular option that is market-linked, and has an investment limit of 15 lakh per person
The Exempt-Tax-Exempt arrangement offers tax deduction to investment but earning is taxed. The withdrawal is tax-free given the tax is paid out at the growth stage.
  • Stocks - If held for more than a year, no tax on capital gains. You pay 15% tax if sold before a year.
  • Equity funds - Just like stocks, there is no tax if held for more than a year. All dividends are tax-free
  • Balanced funds - Though up to 40% of portfolio can be in debt, these enjoy the same tax benefits as equity funds
  • Tax-free bonds - These bonds issued by infrastructure companies carries a low coupon rate 

No tax deduction here for the investor. He invests post-tax income but the earning and withdrawal are tax-free if the investment is held for at least one year.

  • Non Equity hybrid fund - After a year, profit from sale is taxed at a lower rate of flat 10% or 20% after indexation.
  • Debt funds -Tax-efficient way of investing in debt. After a year, profits are treated as capital gains.
  • FMPs - Similar to FDs, but profits are taxed at a lower rate. Very popular among HNIs
Here again, the investor puts in post-tax income. While there is no tax during the growth stage, the earning is taxed at the time of withdrawal.
  • Recurring deposits - Lock into high rates even if you don't have a lump sum. No TDS, so must pay tax yourself.
  • Post office MIS - Monthly income is fully taxable without any TDS. Onus is on the investor to pay tax.
  • Fixed deposits - TDS only up to 10% if interest is more than 10,000 a year. Here, too onus is on investor.
  • Bonds - Income from tax-saving bonds is taxable. Pay tax if you fall in the higher tax bracket
This is possibly the least tax-efficient regime with no tax deduction offered and earning fully taxable. With income taxed every year, there is no tax on principal at maturity.


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