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- Unit linked pension plans - Upto 33% of the pension corpus withdrawn on maturity is tax-free.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.