Tips and strategies to minimize tax liabilities on your investments.
Friday, Aug 16, 2024
There is probably nothing else that hurts more than the term tax. Practically, you work hard for 40 hours a week, 160 hours a month and 1920 hours a year to earn that money that belongs to you but comes with a baggage of taxes.
You decided to make more money and invest a part of what you earn and sometimes even your savings are kept aside for investment opportunities, but despite how much or from where you earn, you are obliged to pay tax.
Let’s digest the fact that tax is obligatory, but there is always a way to minimize it, if not nullify it. How do we do that?
We’ll understand the primary aspect of minimizing tax liabilities as you continue reading. This might seem like a lot to handle and investors who are looking for PMS funds in India can help them save time and tax effectively.
Primarily, why do we pay tax?
We’ll go about it differently. If you were to live in a city that has a muddy road, why would you think a company would want to establish itself in such a city?
It drastically increases the expense to operate a business like Zepto to deliver you, wouldn’t attract an investor to pour money on a company starting from there unless there is no dependency to operate business on a not so good roads, and moreover, will you from your city come to a city like this to work?
Well, there must be someone working on it to make the situation better in such a city where everything can be enabled. The government does this for us and to capacitate the undrastically growing population in a country is a huge deal that requires contributions from the people themselves for the doer to facilitate the good life that you expect.
In short, if you want India to be the first largest economy in a few years, it wouldn’t happen without the people.
With PMS investments in India, managing portfolios gets simplified without having to give in too much emotion in paying tax.
Besides the tax slab for your regular income, how are the investments taxed?
There are enormous investment opportunities but all of them boil down to gains made over time. If it’s in a shorter span, its referred to as short term capital gains, and if it's in a longer span, its referred to as long term capital gains.
Equity and equity related instruments, which include mutual funds, smallcases, listed shares, ELSS, equity ETFs, etc., and debt instruments, which include listed bonds, bond ETFs, define short term as anything less than one year, and if more than one year, it is long term.
Earlier REITS, InvITs, SGBs, and gold ETFs were short term under 36 months, but now they are revised to 12 months and long term above 12 months.
The unlisted shares and bonds, market linked debentures, gold, gold mutual funds, debt mutual funds, and other capital assets were considered to be held within 36 months as short term and otherwise as long term. Now in the budget 2024, all these have been revised to 24 months; anything below is short term and anything above is long term. Real estate as well goes by selling before 24 months as short term and more than 24 months as long term.
The FDs and RDs, as an exception, are taxed as per the income slab as there are no capital gains and only interest is incurred from this instrument and the interest is subject to TDS. Also, the debt instruments fall under generating interest income besides capital appreciation; therefore, interest income is taxed as per the slab rate along with TDS. Debt incurs two types of taxes, one for receiving interest and the other to sell in the secondary market for gains.
Apart from these, there are certain instruments that come under tax free and tax saving categories, which have their own benefits and the government promotes investments in such instruments for saving tax.
Earlier, some investments benefited from an indexation benefit of 20%, such as unlisted shares, listed and unlisted bonds and debentures, land and buildings, SGBs, gold, and any other capital asset, but in the budget 2024, the indexation benefit has been removed from all the assets.
In a nutshell, the improvisation in Budget 2024:
Equity and equity related assets
STCG is now taxed at 20%
LTCG over ₹1.25 lakh in a financial year is taxed at 12.5% without the benefit of indexation.
STCG for unlisted shares is taxed at applicable slab rates.
LTCG on unlisted shares is 12.5% without the indexation benefit.
Debt and debt related assets
STCG is taxed as per your income tax slab rate.
LTCG is taxed at 12.5% without the benefit of indexation.
Both STCG and LTCG for unlisted bonds and debentures are taxed at applicable slab rates
Both STCG and LTCG for market linked debentures and debt mutual funds are applicable at tax rates.
Real estate
STCG is taxed as per your income tax slab rate.
LTCG is taxed at 12.5% without the benefit of indexation.
Under section 54, 54EC and 54F, reinvesting the LTCG in specific assets will give exemption benefits.
Gold, Gold ETFs, SGBs, Gold Funds and other capital assets
STCG is taxed at applicable slab rate.
LTCG is taxed at 12.5% without indexation benefits.
FDs and RDs
Interest is taxed as per income slab rates.
Banks also deduct Tax Deducted at Source (TDS) at 10% if the interest income exceeds ₹40,000 (₹50,000 for senior citizens) in a financial year.
Instruments that save tax under respective sections
You’ve been familiar with the fact that there are a few instruments that help you with deductions and exemptions under a lot of sections; let’s list them here for clarification.
Deductions are generally those that allow you to minus a specific amount from your total tax liability, whereas exemptions are those that disregard specific income for even being considered for tax liability.
That’s how the term tax saving comes into play. It helps you save some amount of tax and is tax free where the income earned from specific instruments is free of tax.
PMS funds in India can manage your portfolio seamlessly, as they understand all of this.
Section 80 C
Public Provident Fund (PPF)
Tax-Saving: Contributions up to ₹1.5 lakh per annum are eligible for deduction under Section 80C.
Tax-Free: Interest earned and maturity amount are tax-free.
Employee Provident Fund (EPF)
Tax-Saving: Employee contributions are eligible for deduction under Section 80C.
Tax-Free: Interest earned and maturity amount are tax-free if continuous service is over 5 years.
National Savings Certificate (NSC)
Tax-Saving: Investments up to ₹1.5 lakh per annum are eligible for deduction under Section 80C.
Tax-Free: Not tax-free; interest is taxable but deemed reinvested for the first four years.
5-Year Tax-Saving Fixed Deposit
Tax-Saving: Investments up to ₹1.5 lakh per annum are eligible for deduction under Section 80C.
Tax-Free: Not tax-free; interest earned is taxable.
Equity-Linked Savings Scheme (ELSS)
Tax-Saving: Investments up to ₹1.5 lakh per annum are eligible for deduction under Section 80C.
Tax-Free: Not tax-free; long-term capital gains over ₹1.25 lakh are taxed at 10%.
Principal Repayment on Home Loan
Tax-Saving: Principal repaid up to ₹1.5 lakh per annum is eligible for deduction under Section 80C.
Tax-Free: Not applicable.
Life Insurance Premiums
Tax-Saving: Premiums up to ₹1.5 lakh per annum are eligible for deduction under Section 80C.
Tax-Free: Maturity proceeds are tax-free if the annual premium is less than 10% of the sum assured.
Sukanya Samriddhi Yojana (SSY)
Tax-Saving: Contributions up to ₹1.5 lakh per annum are eligible for deduction under Section 80C.
Tax-Free: Interest earned and maturity amount are tax-free.
Senior Citizens Savings Scheme (SCSS)
Tax-Saving: Investment up to ₹1.5 lakh per annum is eligible for deduction under Section 80C.
Tax-Free: Not tax-free; interest earned is taxable.
Tuition Fees for Children
Tax-Saving: Tuition fees up to ₹1.5 lakh per annum for up to two children are eligible for deduction under Section 80C.
Tax-Free: Not applicable.
National Pension System (NPS) – Contribution by Individual
Tax-Saving: Contributions up to ₹1.5 lakh per annum are eligible for deduction under Section 80C. An additional ₹50,000 deduction is available under Section 80CCD (1B).
Tax-Free: Partial withdrawals and maturity corpus are tax-free under certain conditions.
Unit Linked Insurance Plan (ULIP)
Tax-Saving: Premiums up to ₹1.5 lakh per annum are eligible for deduction under Section 80C.
Tax-Free: Maturity proceeds are tax-free if the annual premium is less than 10% of the sum assured.
Section 80CCD(1B)
National Pension System (NPS) – Additional Contribution
Tax Benefit: Additional deduction of ₹50,000 over and above the Section 80C limit.
Section 80D
Health Insurance Premiums
Tax Benefit:
Premiums for self, spouse, and children: up to ₹25,000.
Additional ₹25,000 for parents (₹50,000 if parents are senior citizens).
Preventive health check-up: Up to ₹5,000 within the overall limit.
Section 80E
Interest on Education Loan
Tax Benefit: Deduction on the interest paid on education loans for higher education (no upper limit on the amount).
Section 24(b)
Interest on Home Loan
Tax Benefit:
Deduction on interest paid on home loan for self-occupied property: Up to ₹2 lakh.
There is no limit for rented out property (but the overall loss from house property limit).
Section 80G
Donations to Charitable Institutions
Tax Benefit:
100% or 50% deduction on the amount donated, depending on the type of institution.
Donations can be in cash (up to ₹2,000) or any other mode (no upper limit).
Section 80TTA
Savings Account Interest
Tax Benefit: Deduction on interest income from savings accounts (up to ₹10,000 for individuals and HUFs).
Section 80TTB
Interest on Senior Citizens Savings Scheme and Post Office Monthly Income Scheme
Tax Benefit: Deduction on interest income for senior citizens (up to ₹50,000).
Section 54EC
If you sell a land or a building and, in fact, both, then you can save the tax on long term capital gains by investing in 54EC bonds within 6 months of sale, with a maximum allowed of up to 50 lakh, which must be held for at least 5 years. 54EC bonds are available, such as IRFC, NHAI, etc.
Note that the interest from the bonds is taxable.
Sections 54F and 54
The gains from the sale of non residential property if used to buy other non residential property or construct in the place within 1 year or 2 years after the sale for purchase and within 3 years after the sale for construction are exempted from tax under 54F.
And the same for residential property under action 54.
Tax-Free Instruments (Not Under Section 80C)
Agricultural Income
Tax Benefit: Fully exempt from tax.
If you have non agricultural income along with it then it must be below basic exemption limit
Interest from Post Office Savings Account
Tax Benefit: Interest up to ₹3,500 per individual (₹7,000 for joint accounts) is tax-free.
Gratuity
Tax Benefit: Tax-free up to ₹20 lakh on retirement or on death of the employee.
Leave Travel Allowance (LTA)
Tax Benefit: Tax-free reimbursement for travel expenses for official tours or vacations within India, subject to conditions.
Voluntary Retirement Scheme (VRS) Proceeds
Tax Benefit: Tax-free up to ₹5 lakh.
These are just some of the ways to claim deductions and exemptions by investing in them.
How do you optimize when you have investments other than those in tax saving investments?
But what about those other instruments that reap higher returns but don’t come under any of these sections to directly claim any tax benefits? Obviously, you need to pay upfront taxes as they are taxable but there are a few ways you can be wiser with their tax implications and still pay less tax than usual with such instruments.
While there are many tax saving investments, pick the ones that maximize tax savings
You’ve seen a list of them from top to bottom, giving you one or the other benefit. The actual benefit is from those that help with deductions as well as tax exempted on interest and maturity income.
PPF and EPF serve that exact purpose. NPS, on the other end, offers a tax deduction of 1.5 lakh under 80C and an additional 50,000 under 80CCD. As long as you stay invested in the NPS, the returns are not taxable and the maturity amount is tax free subject to specific conditions.
ELSS, on the other hand, is another such tax saving instrument that saves 1.5 lakh under Section 80C but also has the potential to make higher returns. Unit linked insurance planning is applicable where 80C is applicable, and the maturity proceeds are tax free subject to conditions, along with life insurance.
Tax Saving investments are there but if balanced with other good yielding investments, it can save a lot
When a portfolio only has good yielding investments, you need to compromise on the overall returns due to tax liability but if balanced with tax saving investments, it can be a lot more advantageous.
Supposedly, if you have debt and equity in the same portfolio, it may not offer any tax benefits; in fact, it may add additional tax liability if you observe. But an equity with tax saving instrument or a debt with tax saving investment is still beneficial.
PMS investments in India can see to it that your investment portfolio is well diversified.
Long term investing is taxed lower compared to short term investing
When it comes to short term investing it is taxed at 15% but because of new changes in the recent budget, it is now taxed at 20% and long term investing is at 12.5% instead of 10% for amounts exceeding 1.25 lakh.
Firstly, it is witnessable that short term capital gain is taxed higher and when it gets frequent short term trades, it gets even higher. Therefore, you may be susceptible to paying more tax and you may have to do less of that.
Long term investing, on the other hand, is clearly taxed lower comparatively and the longer you keep investing, the less you pay eventually.
The growth stocks are usually capital gains, whereas the dividend stocks are extra income taxed as per the individual tax slab. You preferably want to go to growth stocks as the tax liability is lower as compared to dividend income, which is cumulatively taxed higher for high earning individuals.
Taking advantage of tax rules
As we know, long term capital gain is taxed on the amount exceeding 1.25 lakh when held for more than a year, so conversely, when you make 1.25 lakh after one year, book the profit as LTCG is not applicable up to 1.25 lakh and after 1 year, which means tax is literally zero in this case.
Suppose if you wanted to hold it longer, you could either choose to reinvest or invest in any other instrument. In the same logic, even systematic withdrawals will reduce the tax liability in a scheme like a mutual fund rather than lump sum withdrawals.
Tax harvesting, where you benefit from the rule of losses
Do you have losses? Offset it against gains. Meaning losses are inevitable in high returning assets that have a higher risk associated with them, but at the same time, gains are always the case too. Suppose you made a loss of 1 lakh in the long term and have another stock making a profit of 2.25 lakh in the long term. You are liable for tax only on the 1 lakh, which exceeds 1.25 lakh. This 1 lakh can be offset with the loss of 1 lakh and pay 0 LTCG tax.
Similarly, for short term gains and losses, this can be implemented, where instead of 12.5%, you are subject to 20% tax on the remaining profits after offsetting. The thing to note is that long term losses can only be offset by long term gains, while short term losses can be offset by short term and long term gains as well.
Also, you can carry forward any losses up to 8 years that are unused to offset them against future gains in this span.
Double taxation avoidance agreement policy if you are investing in markets other than India
When you are investing in multiple countries, you may be taxed twice unknowingly and to avoid this situation, the government of India has signed the DTAA, which avoids a scenario where you are only taxed once on your income.
If you are an NRI, then purchase units in GIFT City if you want to invest in India, as there is no tax applicable on capital gains so far and you can leverage it.
The Wrap
Taxes are taken for a purpose that is inevitable and as a citizen, you can leverage the benefits to reduce the tax burdens. In the most optimal case, you can choose to be wiser and use the same tax regulations to invest smarter.
If you’ve read so far, then it means you’ve just consumed a lot of information. Well, when your portfolio is huge, you need portfolio management services to help you earn and save efficiently, That’s how PMS funds in India come into play.
If you are looking for PMS investments in India, GreenPortfolio is the one who has been around managing portfolios effectively. Let us help you get started in investment management.
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