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From Mutual Funds, Stocks, Real Estate To Gold: Here's How Much Tax You Pay For Your Investments

Vanya Gautam
Vanya Gautam
Updated on Dec 21, 2022, 16:02 IST- 10 min read
From Mutual Funds, Real Estate To Gold-How Much Tax You Pay For Your Investments

We all work hard every day to earn for ourselves and our loved ones and live a comfortable lifestyle. But working hard to earn money isn't enough to build wealth. For wealth creation, you have to make your money work for you as well instead of letting it lie idle in your savings account.

That is exactly why we invest our hard-earned money in investment vehicles such as stocks, mutual funds, bank FDs, gold, PPF and real estate. 

But are you aware of the tax rules applicable on such investment instruments? After all, earning money, and then investing it for wealth creation won't be sufficient to complete your investment planning process. It's equally important to be aware of the tax applicable on your invested amount and the returns on it.

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So let us deep dive and give you a fair understanding of how much tax you would have to pay on your investments.

Taxation Rules For Equity Shares

Under income tax rules, any profits from the sale of equity shares are subject to capital gains tax. Investors can opt to invest in listed domestic equity shares, unlisted domestic equity shares, or foreign equity shares in India, and each of these has a different tax treatment. Let's find out.

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Listed Domestic Equity Shares

If listed equity shares are held for less than 12 months before being sold for a profit, the gains are Short-Term Capital Gains (STCG). Similarly, Capital Gains from Equity Shares held for over 12 months is Long Term Capital Gains (LTCG).

STCG rate for listed domestic equity shares is 15%, while the LTCG tax rate is 10%. The 10% LTCG is calculated after an exemption of up to Rs. 1 lakh on aggregate long-term capital gains in a financial year.  

Unlisted Domestic Equity Shares

In the case of unlisted domestic equity shares, LTCG tax rules are applicable if the holding period is 24 months or more. So, STCG tax rules apply to investments that have a holding period shorter than 24 months. 

In the case of unlisted domestic equity shares, STCG is applicable based on the Income Tax slab rate of the investor for the Financial Year. The LTCG, in this case, is computed as 20% of gains with the benefit of indexation.   

Foreign Equity Shares  

Resident Indians can invest up to US$2.5 lakh in a financial year in stocks listed on a foreign stock exchange. From a taxation perspective, foreign equity shares are treated the same as unlisted Equity shares. So, Capital Gains from foreign equity stocks held for less than 24 months are treated as STCG, while the LTCG tax rate is applicable if the holding period exceeds 24 months. 

The STCG tax rate for foreign equity shares is as per the Income Tax slab rate of the investor. Similarly, the LTCG tax rate applicable to foreign Equity shares is 20% with indexation.

Also Read: Why Do Companies List Shares On The Stock Market?

Taxation Rules For Mutual Funds

Based on the type of investment, Mutual Funds can be classified as Equity Mutual Funds, Debt Mutual Funds, or Hybrid Mutual Funds. As taxation rules of Mutual Funds differ based on the underlying investments, let's have a look at how much tax you have to pay on mutual funds.

Equity Mutual Funds 

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Also Read: Do Mutual Funds Invest In Stocks Only?  

Equity Mutual Funds invest 65% or more of their investable assets in Equity-oriented assets such as domestic equity shares.

If you sell/redeem your equity mutual fund units within 1 year then STCG Tax on short term capital gains will be levied at the rate of 15% of the gains.

If you redeem the equity mutual fund after 1 year of investment, gains will be tax-free for up to Rs 1 lakh in a year. LTCG tax of 10% will be levied only on capital gains of above Rs 1 lakh.

Debt Mutual Funds  

Debt Mutual Funds are mandatorily required to invest 65% or more of their assets in debt investments such as bonds, T-bills, Certificates of Deposits, etc. 

The returns booked on redeeming your debt mutual funds investment within 3 years are considered short-term capital gains, which are included in your annual income and taxed in accordance with your income tax slab. 

Whereas, the returns booked on investments after 3 years are considered long-term capital gains and get taxed at 20% with indexation benefits.

Hybrid Funds

The taxation of Hybrid Mutual Funds depends on whether equity-oriented investments comprise up to or more than 65% of the scheme’s portfolio. 

Simply put, if a hybrid mutual fund invests 65% or more of its assets in equity-oriented investment, it is taxed like an Equity Mutual Fund. Else, if equity-oriented investments account for less than 65% of a hybrid mutual fund’s assets, it is taxed like a Debt Mutual Fund.

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Also Read; Benefits Of Investing In Mutual Fund Through SiPs

International Funds

In recent years, International Funds have gained some popularity among investors.  The international funds which primarily invest in equity shares listed on foreign stock exchanges are taxed like Debt Mutual Funds even though these mutual funds invest in equities.

So, International Funds' units sold at a profit before the completion of 3 years are taxed as per the Income Tax Slab rate of the investor. And, those held more than 3 years before redemption qualify for long-term capital gains equal to 20% with indexation.  

Exchange Traded Funds 

There are currently 4 types of ETFs in India – Index ETFs, Sectoral ETFs, Gold ETFs, and International ETFs. 

Index ETFs and Sectoral ETFs are treated the same as equity-oriented investments. So, for holding periods exceeding 12 months, LTCG tax at 10% is applicable on aggregate gains exceeding Rs 1 lakh in a financial year. Whereas STCG tax at 15% is applicable for a holding period shorter than 12 months. 

Gold ETFs and International ETFs are taxed in manner similar to Debt Mutual Funds. So, if the holding period is less than 36 months, STCG tax is applicable as per the income tax slab rate of the investor. And if the holding period exceeds 36 months, LTCG tax at 20% with indexation is applicable.  

Taxations For Fixed Income Investments

Fixed Income investments, such as bonds, can be either listed or unlisted, which impacts the rules governing the taxation of the investment. Examples of listed Debt instruments are Debentures, Corporate Bonds, Government Securities, etc. 

In such investments, LTCG is applicable if the holding period exceeds 12 months, while STCG is applicable if the holding period is less than 12 months. The STCG rate for these investments is according to the Income Tax slab rate of the investor. The LTCG tax rate is either 20% with indexation or 10% without indexation.

But, as per existing taxation rules, the indexation benefit is only applicable to a few listed Debt instruments such as Sovereign Gold Bonds issued by the RBI and Capital-Indexed Bonds issued by the Government of India.  

In the case of unlisted bonds and debentures, the threshold holding period of 36 months is applicable for determining short-term or long-term capital gains. In this case, the STCG tax rate is as per the Income Tax slab of the investor. The LTCG tax rate for unlisted Debt instruments is 20% without indexation.   

As far as bank fixed deposits (FD) are concerned, banks deduct tax at source at the the time of crediting interest to your account if the amount of interest is beyond Rs.40,000 for individuals other than senior citizen (in case of senior citizen the threshold is Rs.50,000). 

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Remember that the TDS is deducted at the time of credit of interest and not when the FD matures.

And that's not all. The tax liability of FD investors does not end with TDS deduction done by banks. The entire interest income on your FD is added to your annual income and taxed as per the depositor’s tax slab, making the post tax returns of bank FDs much lower especially for those failing in the higher tax slabs. The difference between the actual tax liability and TDS amount deducted gets adjusted at the time of filing income tax returns. 

Even for 5 year tax-saver bank FDs that offer the benefit of availing tax deductions up to Rs 1.5 lakh per financial year under Section 80C of Income tax act, the interest earned on these will also be taxed according to your tax slab, which will reduce your post-tax returns.

As far as PPF (Public Provident Fund) is concerned, it is completely tax free, implying that the interest earned as well as the maturity amount are tax-free.

Also Read: Explained: How Banks Calculate Interest When You Break Your Fixed Deposit

Taxation Rules For Gold Investments

Gold is one the most popular and preferred investment vehicle in our country. And that makes it even more important for gold investors to understand the applicable tax on it.

Even though traditionally the physical form of gold has been most popular for investment purpose, whether in the form of jewellery, gold coins, and bars, gold can also be purchased as digital gold, Gold ETFs, Gold Mutual Funds, and Sovereign Gold Bonds

Gold bars Unsplash

When it comes to taxation, physical gold, digital gold, gold ETFs and Gold Mutual Funds are considered the same. All of these gold investment forms qualify as LTCG if the holding period exceeds 36 months, and LTCG rate is 20% with indexation. The STCG tax rate for a holding period shorter than 36 months is as per the Income Tax slab rate of the investor. 

As far as Sovereign Gold Bonds are concerned, all capital gains are tax-free when the bond matures. But, if an investor exits this investment before maturity, then the same STCG and LTCG tax rules are applicable, as other types of gold investments.  

Also Read: Kerala Becomes The First State In The Country To Introduce A Uniform Gold Rate

Taxation Rules For Real Estate Investments 

Besides gold, another popular investment vehicle in our country, is real estate. For real estate investment, STCG tax rules are applicable for a holding period shorter than 24 months, whereas LTCG rules apply if the holding period exceeds 24 months.  

The STCG tax rate is according to the investor’s Income Tax slab rate. The LTCG tax rate applicable to these investments is 20% with indexation. But that's not all. 

The purchase and sale of real estate also features some additional types of tax rules. These include 1% TDS on property sales exceeding Rs. 50 lakh, mandatorily reporting sales exceeding Rs. 30 lakh to the Income Tax Department, etc.   

And in recent years, another type of real estate investment has gained popularity in India wherein you can invest in real estate without actually buying the property. That is through Real Estate Investment Trusts or REITs. At present, there are two key types of REITs available in India – Listed REITs and REITs Mutual Funds. 

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You can purchase listed REITs on the stock exchange, for which a demat account is mandatory for this investment. For these REITs, a holding period of more than 36 months is necessary to qualify for long-term capital gains. The STCG tax rate on REITs units held for less than 36 months is 15%. The LTCG tax rate for REIT investments is 10% on gains exceeding Rs. 1 lakh.  

Besides this, investors can also purchase REITs Mutual Funds such as International REITs fund of funds without having a demat account. These investments are taxed as per the rules applicable to debt mutual funds. So STCG rate is according to the Income Tax Slab rate of the investor if the holding period is 36 months. In contrast, the LTCG tax rate for REITs Mutual Funds is 20% with indexation if the holding period is more than 36 months.  

Also Read; Should Real Estate Be A Part Of Your Portfolio?

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