Mutual Funds, FD, Stock Earnings and Real Estate Gains: How tax is calculated for different asset classes

When you are on your investment journey, investing wisely not only means maximising returns but also minimising tax liabilities. If you are a short- or long-term investor, you have to pay taxes on your investment. Different asset classes have different tax implications. The other factor that determines taxes is the duration of the investment. In this article, you will learn how much tax is to be paid on different categories of investments and what strategies to follow for tax efficiency.

How much tax do you have to pay on an equity mutual fund investment?

The duration of your investment plays a significant role in determining the tax you pay on capital gains, or the profit earned from selling an asset.

Kirang Gandhi, an independent money manager, says that long-term capital gains from equities and equity-oriented mutual funds are taxed at 10 per cent for gains exceeding Rs 1 lakh in a financial year, without the benefit of indexation.

Tax Rules for Fixed Deposit (FD)

Speaking about tax rules for fixed deposit (FD) investment, Gandhi said, "Interest from fixed deposits is taxed according to the individual's income tax slab rates. These tax considerations can impact the net returns from investments, making it crucial for investors to understand and plan for these implications."

Tax on Stock Earnings

Similarly, Jigar Patel, Member of the Association of Registered Investment Advisers (ARIA), explains that for equity shares of domestic companies or equity-oriented mutual funds held for over 12 months, a 10 per cent tax is levied on long-term capital gains, while short-term gains are taxed at 15 per cent.

However, there's a significant advantage: long-term gains up to Rs. 100,000 are exempt from taxation. It's prudent for investors to realise capital gains of Rs. 1 lakh annually to capitalise on this exemption, potentially saving between Rs. 10,400 to Rs. 11,960 in taxes, depending on surcharge applicability, Patel added.

Debt and Hybrid Mutual Funds: New vs old rules

Debt mutual funds and conservative hybrid funds with less than 35 per cent equity allocation purchased after April 1, 2023, are subject to tax based on your income slab. However, those purchased before April 1, 2023, continue to enjoy the benefit of a long-term capital gains tax of 20% after indexation (adjustment for inflation) if held for three years.

Patel advised holding these pre-April 2023 debt and hybrid funds until they mature or interest rates become more favourable, rather than selling them and incurring potentially higher taxes.

Tax on Gains from Real Estate

Capital gains on property sales are taxed differently depending on the holding period. Short-term gains are taxed at your income slab rate, while long-term gains (held for more than two years) are taxed at 20 per cent after indexation.

To minimise taxes on property sales, consider investing the proceeds in capital gain tax saving bonds (up to Rs. 50 lakh) or a new residential property (subject to certain conditions).

What are Tax-Free Investment Options?

There are two investment options on which you can save substantial tax: Sovereign Gold Bonds (SGBs) and Public Provident Fund (PPF)

Sovereign Gold Bonds (SGBs): The capital gain on SGBs held till maturity is exempt from income tax. Investors can subscribe during issuance or buy them on the secondary market and hold them for tax-free maturity benefits.

Public Provident Fund (PPF): Interest earned on PPF accounts is entirely tax-free. Maximising your annual contribution (Rs. 1.50 lakh) can significantly boost your tax-free income.

How to turn losses into gains, 'Tax-Loss harvesting' is your key

Investment strategies often extend beyond mere buying and selling; they encompass financial tactics that can optimise returns and minimise tax liabilities.

Jigar advised, 'An investor should also do tax loss harvesting, i.e., realise the loss and buy the investment again at a lower price. The loss can be adjusted against capital gain to reduce taxable capital gain of the current year.'

This practice of tax loss harvesting not only allows investors to offset losses against gains but also presents an opportunity to repurchase investments at advantageous prices, ultimately enhancing their portfolio's performance while strategically managing tax obligations.