Are you confused about taxation? Don't worry there are many who want some clarity on what is the level of tax they have to pay on their investments in shares, mutual funds, real estate, gold, fixed deposits, bonds, and insurance.
Here is a primer to help you understand your tax liabilities in various investments.
Shares
Is there any tax implication on sale of shares?
After October 1, 2004, any equity share which has been sold through a recognised stock exchange and on which STT (Securities Transaction Tax) has been paid would be entitled to exemption from Long-Term Capital Gains. Similarly, in case of Short-Term Capital Gain on such shares, the gains shall be taxed only at 10%, plus surcharge and education cess.
What is the tax implication of a bonus/rights issue on equity shares?
Bonus on equity shares has a zero (nil) cost of acquisition. The holding period is calculated from the date of allotment of equity shares. The net sales proceeds are treated as the capital gain. The period of holding of such issue is reckoned from the date of the allotment of such issue.
The cost of acquisition of the rights issue on equity shares is the amount actually paid for acquiring such right. The holding period is reckoned from the date of allotment.
Is the dividend income received from investments in shares taxable?
Dividend received from investment in shares is not taxable in the hands of the recipient. The company, distributing the dividend is required to deduct tax from the amount of dividend declared. Such tax deducted will not be entitled to TDS for the recipient.
Mutual funds
Are dividends received on mutual fund schemes taxable?
Since, April 1, 2003, all dividends, declared by debt-oriented mutual funds (i.e. mutual funds with less than 50% of assets in equities), are tax-free in the hands of the investor.
A dividend distribution tax of 12.5% (including surcharge) is to be paid by the mutual fund on the dividends declared. Long-term debt funds, government securities funds (G-sec/gilt funds), monthly income plans (MIPs) are examples of debt-oriented funds.
Dividends declared by equity-oriented funds (i.e. mutual funds with more than 50% of assets in equities) are tax-free in the hands of investors. There is no dividend distribution tax applicable on these funds. Diversified equity funds, sector funds, balanced funds are examples of equity-oriented funds.
Are there any other tax benefits on investments in mutual funds?
Yes. Money invested in tax-saving funds (ELSS) would be eligible for deduction under Section 80C. However, the aggregate amount deductible under the said section cannot exceed Rs 100,000.
What are the tax implications on sale of mutual funds?
Long term capital gains arising from sale of equity-oriented mutual funds is exempt from tax if the said transaction is undertaken after October 1, 2004 and the securities transaction tax is paid to the appropriate authority.
Short-term capital gains on equity-oriented funds are chargeable to tax @10% (plus education cess, applicable surcharge).
Long-term capital gains on debt-oriented funds are subject to tax @ 20% of capital gain after allowing indexation benefit or at 10% flat without indexation benefit, whichever is less.
Short-term capital gains on debt-oriented funds are subject to tax at the tax bracket applicable (marginal tax rate) to the investor.
Fixed deposits & Bonds
What are the tax implications of investing in fixed deposits and bonds like 8% Savings (Taxable) Bonds, 2003?
Interest income on fixed deposits and bonds, such as 8% Savings (Taxable) Bonds, 2003, is taxable under the head 'Income from other sources.' The entire income received is taxable. However, an assessee can claim direct expenses incurred to earn that income under the provisions of Section 57(iii).
Can investors claim any tax benefits for investments made in fixed deposits/bonds under Section 80C? Similarly, are any benefits available to investors on the interest income?
Investments in fixed deposits are not eligible for deductions under Section 80C. Infrastructure bonds qualify as eligible investments under Section 80C. Section 10(15) lists the various securities and bonds on which interest is exempt from tax.
Are investments made in these instruments like fixed deposits subject to tax deducted at source (TDS)? What is the limit below which TDS is not applicable?
Yes, if the interest from such investments exceeds Rs 5,000 in a financial year then TDS is applicable.
Can investors avoid TDS; if yes what documents are required to be provided for the same?
Investors can avoid TDS by presenting Form 15H, which states that the person does not have a taxable income.
Gold
Are there any tax implications for investing in gold?
No, investing in gold doesn't entail any tax implications.
What is the long-term or short-term capital gains liability, arising at the time of sale?
Ornaments made of silver, gold, platinum or any other precious metal and precious or semi-precious stones, whether or not set in any furniture, utensil or other article or worked or sewn into any wearing apparel are treated as capital assets. Hence, a long-term or short-term capital gains liability will arise at the time of sale.
Gold or jewellery when held for the period more than 36 months is treated as long-term capital asset. If they are held for period of less than 36 months, then they are treated as short-term capital assets.
While calculating capital gains, the assessee is entitled to claim as deduction the cost of acquisition from the sale value. In the case of long-term capital gains, the indexed cost of acquisition is allowed as deduction.
Are investments in gold subject to tax implications under Wealth Tax?
Yes, gold falls under the purview of the Wealth Tax Act. The tax is levied on jewellery, bullion, furniture, utensils or any other article made wholly or partly of gold, silver or platinum.
Insurance
What are the tax benefits available to an individual in respect of premium paid on life insurance policies?
Rebate under Section 88 is available in respect of life insurance premium only up to Assessment Year 2005-06. From the Assessment Year 2006-07, life insurance premium paid by an individual qualifies for a deduction under Section 80C of Income Tax Act, 1961.
An individual can claim deduction on premium paid for a maximum of Rs 100,000 in each financial year.
However, an individual can claim deduction on premium paid on a pension plan for a maximum of Rs 10,000 in each financial year. This forms part of the overall Rs 100,000 limit under Section 80C.
Are maturity proceeds on life insurance and pension policies taxable?
The maturity proceeds of life insurance policies are not taxable. However, under pension plans, upto one-third of the maturity amount can be withdrawn in cash and the same is treated as tax-free.
An annuity has to be purchased with the remaining two-third amount. Pension receipts from the same will be treated as income in the hands of the assessee and taxed accordingly.
Can tax benefits be claimed if the premium is paid by an individual on his/her spouse's policy?
Tax rebate under Section 88 can be claimed if the premium is paid by an individual on his/her spouse's policy up to Assessment Year 2005-06. From the Assessment Year 2006-07 life insurance premium paid by an individual on his/her spouse's policy qualifies for a deduction under Section 80C.
What are the deductions available in respect of a medical insurance premium?
The premium paid for medical insurance qualifies for rebate under Section 80D as follows:
Insurance premium paid or Rs 10,000 whichever is lower.
The aforesaid limit is Rs 15,000, where the individual or his spouse or dependant parents or any member of the family (for whom such premium is being paid) is a senior citizen (i.e. one who is resident in India and who is at least 65 yrs of age at any time during the previous year).
Real Estate
Are there any tax implications of making investments in real estate?
There are no tax implications for making investments in real estate.
What is long-term/short-term capital gains liability, arising at the time of sale?
In case of immovable property being sold within a period of 36 months from the acquisition, the gain arising therefrom would be short-term capital gain and liability for taxation at 30%.
In case the immovable property has been held for more than 36 months, the gain would be long-term capital gain and the tax thereon would be at the rate of 20%.
The assessee would be entitled to index the cost as per the cost inflation index. If the asset has been purchased prior to April 1, 1981, then the assessee would be entitled to substantiate the cost by the market value as on April 1, 1981 and index the cost thereafter. Long-term capital gain is taxable at a flat rate of 20% (plus surcharge plus education cess) for the Assessment Year 2005-06.
How is rental income from one's property treated for the purpose of taxation?
Rental income is taxed under the head 'Income from house property.' Deductions are available under Section 23 and Section 24 of the Act. It may be noted that a deduction is available for repairs, whether incurred or not.
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