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Investors can earn returns from different investments such as stocks, bonds, or gold by selling them for a higher price. The difference between buying and selling price of these capital assets is called capital gains. These capital gains or profits, however, are not always tax-free. Therefore, knowing the tax rules for different assets become crucial to evaluating actual returns from any investment.
The tax rules on capital gains vary depending on the type of investment and the holding period. Let’s look at the various tax rules for different investment products to evaluate their post-tax returns better.
Taxation Rules for Equity Shares
Apart from shares of domestically listed companies, Indians now have an option to diversify their holding by investing in foreign stocks globally. The capital gains earned from these investments are taxed differently.
Domestic Stocks: If you sell domestic equities for a profit before 12 months, the gains are Short-Term Capital Gains (STCG). The STCG tax rate for listed domestic stocks is 15%. On the other hand, capital gains from stocks sold after 12 months are long-term capital gains (LTCG). The LTCG tax rate is 10% on capital gains that exceed Rs. 1 lakh in a financial year. For example, if your LTCG is Rs. 1.7 lakh in a financial year, you will pay Rs. 7,000 (10% of Rs. 70,000) as LTCG tax.
Foreign Stocks: Indians can invest up to US$2.5 lakh in a financial year in stocks listed on foreign stock exchanges. From a taxation perspective, capital gains from foreign stocks held for less than 24 months are treated as STCG, while the LTCG tax rate is applicable if the holding period exceeds 24 months.
The STCG tax rate for foreign equity shares is as per the Income Tax slab rate of the investor. Similarly, the LTCG tax rate applicable to foreign stocks is 20% with indexation. Indexation is the process that accounts for inflation between the time you bought and sold an asset and allows you to decrease your tax liability.
Capital Gains Taxation Rules for Mutual Funds
Mutual Funds invest in various asset classes such as equities, debt, or gold. But for taxation purposes, Mutual Funds can be simply divided into Equity-Oriented Funds and Non-Equity Funds.
Equity-Oriented Funds: These are funds that invest 65% or more of their investable assets in equity-oriented assets. From a taxation standpoint, these funds are treated the same as domestic stocks.
Non-Equity Funds: These are schemes that invest less than 65% of their corpus in equity-oriented assets. So, all types of Debt Funds or Hybrid Funds that invest less than 65% of their assets in equity are also considered Non-Equity Funds. International Equity Funds that primarily invest in stocks listed on foreign stock exchanges are also Non-Equity Funds.
Capital gains from all these Non-Equity Funds held for less than 3 years are subject to STCG. The STCG rate for these funds is as per the applicable Income Tax slab rate of the investor. On the other hand, LTCG tax applies to units held for more than 3 years. And LTCG tax rate for these Funds is 20% with indexation.
| Fund Type | Short-Term Capital Gains (STCG) | STCG Tax | Long-Term Capital Gains | LTCG Tax |
| Equity Funds and Equity-Oriented Hybrid Funds | Shorter than 12 months | 15% | 12 months and longer | No tax up to Rs. 1 lakh gain. Any gains above Rs. 1 lakh is taxed at 10% |
| Non- Equity Funds (Debt Funds, Debt-Oriented Hybrid Funds) | Shorter than 36 months | Taxed at the investor’s income tax slab rate | 36 months and longer | 20% with indexation benefit |
Taxation Rules of Gold Investments
There are multiple ways to invest in gold. It can be physical gold, digital gold, Gold ETFs, Gold Mutual Funds, or Sovereign Gold Bonds.
For taxation, 4 of these Gold investments – physical gold, digital gold, gold ETFs and Gold Mutual Funds – are considered the same. Gains earned by selling these investments after 36 months are LTCG. And these long-term gains are taxed at 20% with indexation. In contrast, gains for a holding period shorter than 36 months are called STCG and taxed at the Income Tax slab rate of the investor.
The tax rules are a bit different for Sovereign Gold Bonds. In this case, all capital gains are tax-free on the redemption. But, if an investor exits this investment before maturity that is 8 years, then the same STCG and LTCG tax rules are applicable, as other types of gold investments.
Taxation Rules for Real Estate Investments
In the case of investments in Immovable property such as Real Estate, gains earned on selling the property before 24 months are considered as STCG. The short-term gains are taxed as per the Income Tax slab rate of the investor. In case the property is sold after 24 months, the gains will be classified as long-term. LTCGs are taxed at 20% with indexation.
Bottomline
Knowing how much tax helps you anticipate the actual post-tax returns. Secondly, correct tax payments reduce the chances of being audited by the Income Tax Department. So, you must keep these tax rules in mind while investing.