Investments are a good form of saving money. They not only stop or restrict you from spending money but they increase it with time giving you extra money back. However, since you are earning income on that investment, you are also required to pay taxes levied by the Government in the form of Income Tax. By paying these taxes, the actual returns on these investments are much lower then actual returns earn. Here are a list of few investments that can give you returns but improper tax planning of these returns can affect your overall returns.
a) Investing in Fixed Deposits, Mutual Funds, NPS Etc :-
Many investments are EEE -Exempt, Exempt, Exempt, such as PPF. They are Exempt when you deposit, they have exempt interest income, they are exempt on maturity. Thus no taxes are being paid when you earn income on these investments, no taxes when you get the amount on maturity.
Some investments are EET – Exempt, Exempt Taxable. Such as ELSS. These are Exemept when you deposit, Exempt on earning i.e. dividend and interest income but lump sum amount received at the time maturity or withdrawal is taxable.
Then there are ETE – Exempt Taxable Exempt. Such as Tax Saving FDRs. These are exempt at the time of deposit, their interest is taxable, their Withdrawal is exempt.
There is a section 80CCC under Chapter VI-A of Income Tax Act, Which provides that exemption upon deposit in a pension fund. These are Exempt at the point of investment, but taxable when you withdraw.
If a person has not planned these effectively, it might lead to high taxation when the investment is matured.
Moreover, you are earning interest on FDRs which is less interest-bearing then PPF, and also paying tax on the interest earned, then its a bad investment. For Example, you have deposited a Fixed Deposit of Rs. 1 lakh at a rate of 6.5% for one year, and your interest earned is taxable at a rate of 20% given you are in 20% tax bracket. Then, when earning Rs. 6500/- interest on that amount, and paying 20% tax i.e. 6500/- x 20% tax = 1300/- Tax amount brings your net earning to Rs. 5200/- which is only 5.2% net return on investment.
Had this amount been invested in PPF then its return would have been 8% without Tax. But again, you have to wait for 15 years for this PPF amount deposit to be matured.
b) Investing in Shares and Stocks:-
Shares that are bought and sold within one year of time frame are treated as Short Term Capital Gain and are chargeable to STCG taxes. This STCG is Taxable at a 15% tax rate. However, shares that are held for a period more then 1 year then they are treated as Long Term Capital Gains and are taxable at 10% tax rate, and only if the value of this LTCG is more then if it is more then 1 lacs.
If the investment time frame is decided well in advance and based on future requirements of money then they can be very beneficial in terms of tax savings.
c) Investment in land and properties:-
In order to curb circulation of Black Money, tax laws have been amended imposing huge taxation if properties are bought or sold at below-market values. in order to understand it clearly, let us assume a property has a market value of Rs. 15 lacs but the stamp duty value of the property is 25 lacs. You have purchased the property at 12 lacs as you were getting a cheaper rate than the market price. There are three rates here, one is stamped duty value which is as per government norms, the Market value that a purchaser is willing to pay for that property, and the actual value you purchased the property.
Purchasing it at a rate of 12 lakhs was a bad decision as to the difference between 25 lakhs–12 lakhs=13 lakhs will be treated as your income as per Income Tax Act. If we assume you are at 30% tax slab then in such case you have an additional tax liability of Rs. 13 x 30% = 3.9 lacs and your total costing is Rs. 12+3.9 = 15.9 lacs which is above market value. A bad investment decision with higher taxes.
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