Now that the Budget has spelled out an additional breather of Rs.50,000/- for investments under the Section 80 C basket, is your investment plan undergoing a rejig? One shouldn’t just consider taxation of various instruments at the investment stage, but also at the maturity stage. We give you a low-down on how various investments are taxed at maturity.
The maturity proceeds from traditional and Unit-linked Insurance plans are tax free in the hands of investors or heirs as per Section 10 of the Income Tax Act, 1961. However, if one has failed to pay a minimum of five premiums under a policy and surrendered it, then the taxation is different. In such a situation, the surrender value may be added to your income and taxed according to your tax slab.
Though Pension Plans are issued by life insurance companies, they are taxed differently. Only 1/3rd the maturity proceeds of a pension plan are tax free. One needs to compulsorily purchase an annuity using 2/3 rd the maturity amount. One faces a double whammy in terms of taxation when Pension Plans are surrendered before maturity. The deduction claimed under Section 80 CCC is reversed for the premium paid so far and the surrender amount is added to your income. The amount received by the family upon death of the pension plan holder is tax free.
Equity shares that are sold through the Indian Stock Exchanges are exempt from tax if they have been held for long-term (more than 12 months). If one sells the shares within the first 12 months of purchase then a tax of 15% irrespective of the tax slab is levied.
Dividends that are received too are tax exempt as the company already pays a dividend distribution tax before issuing dividends.
Equity Mutual Funds
The taxation for equity oriented mutual funds is similar to that of shares. If one sells units of equity-oriented mutual funds within one year of investing then a short-term capital gain tax of 15% is levied. But there is no tax applicable if one holds the units for more than a year.
Under Debt Mutual Funds, one has to pay taxes for holding them both for short-term or long-term. If residents or NRIs hold debt funds for less than a year then the short-term capital gain get taxed at individual slab rates. This reduces to 10% (20% with indexation) if held for long-term. The definition of long-term was pegged at 12 months for debt mutual funds. However, the Union Budget 2015 has altered this to 36 months and the tax levied on long-term gains through debt mutual funds are now at 20% with indexation.
The Public Provident Fund has gained popularity because of the tax-efficient earnings. The amount that one receives at the end of the 16-year period is completely tax-free.
Senior Citizen’s Savings Scheme
The entire interest income earned from this scheme is taxable in the hands of the investor. The interest is paid quarterly and a TDS of 10% is deducted if the interest exceeds Rs 10,000 annually. Also, premature withdrawal shall be taxed in the year of withdrawal.
Bank Fixed Deposits
In bank FDs, one has to pay tax on the interest earned at the end of a financial year even if the interest would be received at maturity. The interest earned on fixed deposits is added to the individual’s income and are taxed, according to the tax slab that the individual falls into.
If the interest on a particular fixed deposit exceeds Rs 10,000 then 10% tax deduction at source (TDS) will be done. If you haven’t updated your PAN with the bank then they can rightfully deduct 20% as TDS.
These bonds, some of which mention “tax-free” in their name aren’t actually tax-free in terms of interest received. The interest received from the bonds is taxed at the normal rates applicable to an individual.