There are a wide range of investments that allow you to reduce your tax liability Income Tax is a complex subject . Our goal here is to familiarise you with the taxation aspects only of that income (or losses) that you may have from your investments and the ways and means available to use your investments to reduce the amount of tax you have to pay. This chapter only seeks to familiarise you with concepts, It is recommended that you consult your tax advisor for details and classification on tax laws that might be needed to actually file returns. Paying Taxes On Investments Dividends paid by funds or shares is dividend income, while interest earned from bank, post office or other such deposits is called interest income. Here's an overview of the taxation situation of each of these: Inflation Adjustment for Long-Term Capital Gains Type of Investment Short-term Holdings Long-term holdings Shares, Indian Equity Funds and Equity-oriented Hybrid Funds Up to 1 year; taxed at 15 per cent Not Taxed All other funds (fixed income, gold and international funds) Up to 3 years; Added to income Treated as long-term capital gains, adjusted for inflation Type of Investment Dividend Distribution Tax Shares, Equity Funds and Equity-oriented Hybrid Funds None All Other Funds 0.25 Source: Income Tax Act, 1961 As an example, say you have made an investment in 1997-98 for R1 lakh and sold it for R5 lakh in 2012-13. Your capital gains tax will be adjusted for the inflation adjustment factor i.e. 852 divided by 331, which is 2.574. By this method, your cost of the investment will be deemed to be higher by 2.574 times than what it actually was, that is, it will be R2.574 lakh. Thus, your profit will be R2.42 lakh and the tax payable will be R48,500. Interest Income: Interest income is simply added to your income and taxed according to whatever tax bracket you are in. Financial Year Index Financial Year Index Financial Year Index 1981-82 100 1992-93 223 2003-04 463 1982-83 109 1993-94 244 2004-05 480 1983-84 116 1994-95 259 2005-06 497 1984-85 125 1995-96 281 2006-07 519 1985-86 133 1996-97 305 2007-08 551 1986-87 140 1997-98 331 2008-09 582 1987-88 150 1998-99 351 2009-10 632 1988-89 161 1999-00 389 2010-11 711 1989-90 172 2000-01 406 2011-12 785 1990-91 182 2001-02 426 2012-13 852 1991-92 199 2002-03 447 2013-14 939 Source: http://www.incometaxindia.gov.in/Pages/utilities/Cost-Inflation-Index.aspx Saving Taxes Through Investments Section 80C · Life Insurance premium payment · Home loan principal, wherein the principal portion of the home loan EMI qualifies for deduction under Section 80C · Your contribution to Employees Provident Fund (EPF) (employers' contribution is not deductible). · Tuition fees for two children can be claimed upto R1 lakh. However, any payment towards any development fees or donation to institutions is excluded. Also, aggregate deduction under 80C should not exceed the overall R1.5 lakh limit. · Contributions to the PPF · Investments in the senior citizens savings scheme · Savings in notified term deposits in scheduled banks with a minimum period of five years under the bank term deposit scheme, 2006. · Savings in post office time deposits with 5-year lock-in · National Savings Certificate, six-year government-backed security available at post offices · Investments in tax planning mutual funds, (ELSS) · Investments in pension plans Section 80CCG (Rajiv Gandhi Equity Savings Scheme) You have to be earning less than R12 lakh per annum. You should never have invested in equities before, this being judged by whether you have transacted in a demat account before. The equities eligible are the ones in the BSE 100 and the CNX 100 indices, PSUs in the Maharatna, Miniratna, and Navaratna categories, listed mutual funds that are invested entirely in the above equities, and IPOs of large PSUs. When you invest in these equities, the lock-in period is three years. For the first year out of this, there's a complete lock-in whereby you cannot do any trading for your Demat a/c. After the first three years, you can buy and sell within this pool of securities. When you trade, there's bound to be some period when you have some cash but you must ensure that you are holding the actual securities for at least 270 days in a year. These are the most important rules and conditions. There are many others relating to fall in the value, corporate actions like mergers or delistings. Notably, RGESS investments in mutual funds cannot be made through an ordinary fund distributor or directly with an AMC as most of us do. They must be made only through a demat account and in funds listed on the stock exchanges. The problem with all this complexity is that tackling it yields an advantage only for three years. Uniquely among all the tax-saving schemes ever launched by the government, RGESS benefits can be used only for three successive years by any tax payer in a lifetime.
Of the various types of investments discussed here, mutual funds and stocks are capital assets and gains from the purchase and sale of these is called capital gains. If you lose money on them, then those are capital losses. Capital gains or losses occur only when you actually sell an investment and get the money.
Long-term capital gains tax is payable on gain realised on investments held for atleast three years. Capital gains tax on such gain is 20 per cent adjusted for inflation or 10 per cent if not adjusted for inflation. The inflation adjustment is done according to this table:Capital Gains from Mutual Funds and Shares
Dividend Income from Mutual Funds and Equity
Cost Inflation Index for Calculating Capital Gains
There are three sections of the income tax law that let you save tax by making specific financial investments. These are:
Section 80C offers a window of investment opportunities for up to R1.5 lakh investment in each financial year. This benefit is available to everyone, irrespective of their income levels. For instance, if you are in the highest tax bracket of 30 per cent, the investment of R1.5 lakh under this section will save you R46,350 each year (for income upto R1 crore). The various financial products that qualify for Section 80C benefits are as follows:
The RGESS is a new scheme that provides tax relief to new equity investors but was modified in the budget 2013:
Best Tax Saver Mutual Funds or ELSS Mutual Funds for 2015
1. ICICI Prudential Tax Plan
2. Reliance Tax Saver (ELSS) Fund
3. HDFC TaxSaver
4. DSP BlackRock Tax Saver Fund
5. Religare Tax Plan
6. Franklin India TaxShield
7. Canara Robeco Equity Tax Saver
8. IDFC Tax Advantage (ELSS) Fund
9. Axis Tax Saver Fund
10. BNP Paribas Long Term Equity Fund
You can invest Rs 1,50,000 and Save Tax under Section 80C by investing in Mutual Funds
Invest in Tax Saver Mutual Funds Online -
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