Taxation in Investments - A Brief Overview

India is one of the fastest developing countries in the world, and with this development comes a chance to make money by investing in different sectors. This article looks at the taxation aspect of investing in India and some points to remember that can reduce your tax liability while investing. Depending on how one plans to invest across durations, the tax applicable will also change. Having a bit of understanding of how the overall taxation process works makes it easier for anyone to move ahead on investments in a much more informed manner.

Types of Taxation in India

There are multiple types of taxes in India. However, from the perspective of investments, the concerned types of taxes are only limited to a handful few.  Taxes will broadly fall into the categories of Direct and Indirect taxes. The taxes are different from each other mainly in the way they are implemented. From the perspective of investments, the taxes involved mostly fall within the ambit of direct taxes.

Direct taxes involve the following taxes -

1. Income Tax
2. Gift Tax
3. Wealth Tax
4. Capital Gains Tax
5. Securities Transaction Tax
6. Corporate Tax

The only indirect tax that can be applicable on income from investments is TDS (Tax Deducted at Source).

Tax Implications of Investments

A long-term investment is when an individual invests in a company, security, or asset and doesn't sell it for at least one year. Long-term investments are taxed differently from short-term investments. Long-term investments are considered a more stable option that aids in the growth of wealth. Short-term investments are made for a quick profit but are riskier compared to long-term options.

Capital Gains tax is applicable on any kind of investment done. Trading on the stock market will attract a securities transaction tax. Additionally, if the net wealth of an individual exceeds INR 30 lakhs, 1% wealth tax will be applicable on the same (as of August 2021).

Long-term capital gains tax is at 20% for anything that is not equity or shares/units thereof. Short-term capital gains taxes can be added to the income tax returns of an individual or might be taxed at 15% if securities transactions are involved.

Typically, for long-term investments, when it comes to commercial real estate (CRE), a TDS at a certain rate is deducted on the monthly rentals. These can be claimed at the end of the year.

Strategies to Save on Taxes

The important thing to note is, as a resident Indian, your global assets will be accounted for when considering wealth tax. For NRIs on the other hand, only the assets held inside India will fall under the ambit of wealth tax.

You can reduce LTCG by investing the proceeds of a sale of a long-term capital asset in government bonds, within 6 months of the sale of the asset, as per Section 54EC. That is obviously one of the simplest ways we have mentioned here. You can seek the advice of your tax consultant for a more detailed analysis on saving taxes. Considering the tax involved around investments, what would you consider to be the most valuable investment option? Shares, gold, mutual funds, or real estate? Do let us know.