Every Indian someway or other invest their savings in a stimulating way in different segments. The most significant problem is almost 87% of individual and salaried are not aware of tax on investment income in India.
The rate of return is different for every category of investment, but very few are aware of the role of Income tax on your return you earn from your investment.
Income tax liability varies category wise, some investment holds exemption benefit up to some extent, and the treatment of Income-tax for the return based on time (Long Term/Short Term) are different.
Along with this, most of the Taxpayer (including me in my initial stage) does not aware “how and where” to mention your return from investment in both the scenario (Taxable/Non-taxable) in Income tax return form.
Here is a Segment of Investment with their current annual return.
Banking Investment/Small Investment
Investment or keeping your money study in the bank account is the easiest and safest way for the common man.
Saving Bank Account Balance
The amount kept study in your bank account is the best liquid fund which can be easily withdrawn from the bank as well as ATM machine.
For the amount kept in your account, you will get quarterly interest for the average balance (which is your earning).
- Interest earned from the amount in Saving bank account up to Rs 10,000 is exempted from tax u/s 80TTA and above that the whole amount is taxed at income tax slab rates.
- The senior citizen can additionally benefit with tax exemption up to Rs 50,000 u/s 80TTB on the interest income from bank/ post office fixed deposit, recurring deposit or savings account.
- Paying Tax on your Interest earned from the amount in Saving bank falls in your own hands, Bank will not deduct any TDS from such account.
Interest from a savings account is mandatory to mention under “Income from other sources” head.
No the other hand for availing exemption enter the amount u/s 80TTA and for senior citizen u/s 80TTB.
It is very important to understand that before taking benefit of section 80TTA/80TTB, you have to mention the amount under Income from other sources.
Fixed Deposit (FD) in Banks
Fixed Deposit is popularly known as FD among people in India. The interest rate of Fixed Deposit with bank varies bank to bank and time to time. Generally, fixed deposit schemes are offered for 7 days – 10 years.
Few Banks deduct TDS @ 10% from your interest income of Fixed Deposit if the annual interest exceeds Rs 40,000 and Rs 50,000 unless you submit Form H/G to the bank for non-deduction of TDS.
In the case of the senior citizen, the interest income from Fixed Deposit is exempted u/s 80TTB up to Rs 50,000 and the rest of the income of taxable.
Interest from Fixed Deposit is mandatory to mention under “Income from other sources” head selecting Interest from Deposit.
For the Non-senior citizen, the whole amount earn from interest is taxable under suitable tax slab.
Tax-Free Fixed Deposit – In case of Tax-free FD the interest earned is taxable and added to your Total Income and on maturity, the principal amount received is not treated as income in your account.
What If Tax-Free Fixed Deposit is redeemed before maturity?
It is mandatory to hold the FD up to 5 years, In case of prematurity, the whole amount comes under the Tax radar.
Recurring Deposit (RD) in Banks
Recurring Deposit is as similar as Fixed Deposit. Banks deduct the TDS on interest received from the recurring deposit and it was revealed in Form 26AS.
The entire interest earned is added to the income and taxed according to the income tax slab rates for below 60 years of age taxpayers and for senior citizen, it is exempted up to Rs 50000 u/s 80TTB
Regular Saving Scheme
Post Office (PO) Saving account
Post Office saving account is very common among people having lower trust with banks or any other investment scheme.
- According to section 10(15)(i) of the income tax act, interest earned Rs 3500 in the case of an individual account and Rs 7,000 in the case of the joint account is exempted and the above interest earned is added to Total Income.
- It is mandatory to disclose your Income from Intrest from Post Office.
- Up to Rs 3,500 in the case of an individual account and Rs 7,000 in the case of the joint account, the amount must be mentioned in the exemption section of ITR form.
- Also, this exemption is over and above tax exemption offered by 80TTA.
Public Provident Fund (PPF)
(PPF) Public Provident funds interest rate is governed by the Government of India, this account is easily opened in any Bank. There are two parts of PPF.
- The Principle amount
- Interest amount.
The interest amount is pump into your PPF account which is later treated cumulatively and will get interested benefit into it.
PPF falls under EEE (Exempt, Exempt, Exempt) tax basket. The interest, as well as the principal amount received, is 100% Tax-free under section 80C maximum up to Rs 1,50,000.
Dividend Income is part of disbursement released by domestic companies to their shareholders.
According to section 10(34) of the Income Tax Act, 1961, dividend received from a domestic company is exempt in the hands of the shareholders provided such dividend has already suffered Dividend Distribution Tax (DDT) under section 115-O.
You must disclose the amount of dividend income in your ‘income from other sources‘ and the same amount required to mention in Exemption section u/s 10(34).
Discloser: The dividend received shall be chargeable to tax at the rate of 10% in the case if the aggregate amount of dividends received from a domestic company during the year exceeds Rs 10,00,000 (Section 115BBDA).
Dividend received from a foreign company is taxable. It will be charged to tax under the head “income from other sources.”
Employee Provident Fund (EPF)
Every Employee is aware of EPF (Employee provident fund), EPF withdrawal is taxable under certain circumstances and exempt under certain circumstances.
The period of 5 years in Employee Provident Fund plays an important role in the treatment of tax in EPF.
The Contribution of Amount from Employee side is exempted u/s 80C.
- The amount withdrawn before completion of 5 continuous years of service is taxable under certain circumstances –
As we all know the investment amount consists of 12% basic salary from the employer side and employee side both.
While withdrawn before completion of 5 years, the contribution from employer side is 100% taxable under the head “Income from other sources”.
The Contribution invested from your (employee) side shall become taxable under the head “Income from Salary” no condition that while making the investment you have already claimed u/s 80C. If not then the amount is tax-free.
The interest earned from the amount is become taxable under “Income from Other Sources”
- Withdrawal of EPF after 5 years of continuous service – The entire amount including interest and Principle is Tax-free.
Although the amount is exempted it is mandatory to report the income u/s 10(12).
Amount Received from Life Insurance Policy (Endowment/Money back Policies)
If the premium paid for all the years is less than 10% of the maturity amount then the amount received on maturity is 100% tax-free u/s 10(10).
Any money received from a life insurance policy, where the premium is more than 10% or 20% of the sum assured as the case may be, is fully taxable under ‘Income from Other sources’.
Equity & Derivative
Investment in Equity and Derivative results profit and Loss for the investor, You can earn in two forms.
- Long Term – More than a year
- Short Term – Within a year
If your investment is held for more than 1 year, the gains are classified as Long Term Capital Gains and are taxable at 10.4% under Section 112A of the Income Tax Act, if your LTCG exceed Rs 1 Lakhs.
Long Term Capital Gain less than Rs 1 Lakh is tax exempted.
On the other hand, if your investment is held for less than 1 year, the gains are classified as Short Term Capital Gains and are taxable at 15.6%.
Derivative income always falls in Short Term Capital Gains (STCG) because the maximum holding period is three months.
ITR 2 comes into play when we talk about Long term capital gains & Short term capital gain.
It is mandatory to disclose your LTCG or STCG income though it is not taxable under Schedule CG Part B, point 4(d) of ITR II.
Tax on Mutual Funds Returns
Investing in mutual funds generates capital gains, which can be taxable. Investment in mutual funds comes under different categories.
- Lumpsum (One Time)
- SIP (Systematic Investment Plan)
The redemption process also available with both the options for the investor.
Now the question is How the profits come out from mutual fund investment taxable.
- In case of a Long term, more than 12 months for equity mutual funds and balanced mutual funds, long-term capital gains tax or LTCG is applicable.
- In case of a Short term, Less than 12 months of short-term capital gains tax applies.
Long term capital gain tax LTCG in excess of Rs 1 lakh is taxable at the rate of 10% without the benefit of indexation.
There is a 15% tax on short-term gains from equity funds if the units are redeemed before 12 months.
SIP (Systematic Investment Plan)
Taxation on investment in SIP is very interesting, When you opt for SIP, you are investment periodically manner, (daily, weekly, monthly, quarterly). if you decide to reed your investment within one year, it is very important to understand the game of dates.
If you withdrew the whole corpus after 1 year, your first SIP falls under LTCG and the rest falls under STCG, on the other hand, if you opt for redemption in SRP (systematic redemption) the whole comes under LTCG.
Gold Jewelry/ Bullion/ Physical Gold
Investment in Gold in any form is the best hedging fund for the people in India. The opinion behind this is different people to people.
But if you invest in gold and your investment is held for more than 3 years, it is classified under LTCG & taxed at 20% after indexation.
Booking your profit before 3 years brings your investment under STCG and added to your gross income.
Tax on Sale of Property
Tax on sale of property depends upon your holding, let’s understand with an example.
- If the property you holds for Less then 24 months (w.e.f FY 2017-18 / AY 2018-19) then the property is treated as Short Term Capital Asset. You as an investor will make either Short Term Capital Gain (STCG) or Short Term Capital Loss (STCL) on that investment.
- On the other hand if the property you holds for more then 24 months (w.e.f FY 2017-18 / AY 2018-19) then the property is treated as Long Term Capital Asset. You as an investor will make either Long Term Capital Gain (LTCG) or Long Term Capital Loss (LTCL) on that investment.
How much percentage of tax you have to pay?
- If your property comes under Long term capital gain the rate of tax is 20% after indexation benefit.
- Short term capital gains are taxed at the marginal tax rate applicable to you.
In this article Income tax on all the major investments return is covered along with ITR form.