Tax you pay on your investments in 2011

Tax you pay on your investments in 2011


Have you ever wondered hOw taxation affects your investments? How much tax you end up paying on returns on various investing instruments? This is a very important issue which every  smart investor should be aware of. Here we briefly discuss various investment options and related tax issues.




PPFs, FDs, and Government securities


Public Provident Fund or PPF and bank fixed deposits or FDs and the various Government securities are very low risk investments and have similar returns.Perhaps the only difference that you could think of between a PPF and an FD is the number of years of tenure. While PPF has a 15 Year term, FDs has different terms. In fact FD comes with lesser number of lock in periods.


On the tax treatment for PPF and FD the deductions under 80C are the same however there is difference on the tax returns front. The returns that you get on FDs are taxable while on PPF it is tax free. So assuming that both PPF and FD gives you 8 percent returns, the post tax returns on PPF would still remain the same at 8 percent while it will be 5.6 percent post tax returns on FDs if you fall into the 30 percent tax bracket.




Other investment options




The returns from the various Government securities like the National Savings Certificate (NSC) and Kisan Vikas Patra (KVP) are taxable and considering the same example as above your post tax returns would stand at 5.6 percent. After having considered which tax bracket you fall in your investment should be where the returns are either tax free or the returns which do not get taxed much.


Stock market investment in stocks and equity mutual fund


Stock market investing is relatively a higher risk and quick return investment. A systematic investment plan is usually a safe bet and long term investments give better returns. Equatiy investment has short term capital gain tax of 15 percent and cess if you sell your equity mutual fund before one year of holding. If your hold your investment longer than one year it is not taxed.


Insurance, pension plans


When you get back your money which you invested in an insurance or retirement plan it is taxed at normal rates. However the returns from other types of insurance plans such as guaranteed, bonus linked or ULIPs, and a whole life insurance plan that comes with an option of YoY withdrawals are tax free.


Debt funds and bank FDs


The returns from Liquid Plus funds which are tailor made tax saving instruments for very short term deposits are slightly higher than the traditional bank FDs.


Also unlike the taxable FD returns the returns from these funds are tax free. Despite some percentage of tax on the dividend distribution tax from Liquid Plus funds the post tax returns per annum from this fund is considerably higher compared to FDs.


Similarly, the investments in long term deposits of more than one year such as Fixed Maturity plans or FMPs give 'double indexation' benefit. However the timing of investing and withdrawal in FMPs is important.


While investing in FMP is ideal just prior to the end of a financial year you can withdraw it after the end of the next financial year. The tax rates are minimal compared to FDs and higher post tax annualised returns by over 50 percent.


Gold, real estate


The sale of gold jewelry within a period of 36 months from the date of buying is taxable at normal rates. Even if the sale is made after 36 months after employing the indexation benefit you could still end up coughing about 10 to 20 percent of taxes.


So the best way to save tax would be to invest in tax saving gold mining funds or mutual funds and in exchange traded funds.


The impact of taxes on real estate which is an illiquid asset depends on the holding period. While selling of a real estate within 36 months of buying would attract taxes at normal rates, exemption can be claimed if a residential property is sold after 36 months but only if it is re-invested.