In our day-to-day lives, we often try to cut down on our spending and liabilities; be it hailing a rickshaw instead of an AC cab, or choosing to walk down altogether. However, while investing, we try to maximise our returns by just investing in high-interest rate avenues to maximise our gains.
We often fail to notice that while saving and investing, taxes are an expensive cost and planning and managing that can add real extra returns. By strategically managing investments, individuals can legally minimise their tax obligations, thereby maximising their overall wealth which is commonly referred to as tax-planning.
Unlike the conventional belief, tax planning is essential not only for people who come under the tax bracket’s purview, but for all that are saving money and making investments. As the old adage goes “A rupee saved is a rupee earned”; this article will help you understand how you too can save your rupee (at least from being taxed).
In the Indian landscape, taxation on investments follows a two-pronged approach.
First, for certain investments, the individual investor needs to pay tax while entering into an investment. These transactional charges include Sales-and-Transaction Tax (STT), Good-and-Services Tax (GST), Stamp Duty as applicable on that investment choice.
Second, tax is applicable and levied on the returns or gains generated on any investment. These taxes on gains vary across different asset classes and the tenure of the investment.
Let’s first explore the transactional charges in detail, and how you can save on these:
Once a person has decided which asset class they want to invest in, they should look into different methods of making that investment, with vehicles which are tax-efficient. Case-in-point for a gold investment; there are multiple options like physical gold, digital gold, Gold ETFs and Sovereign Gold Bonds (SGBs). One can invest in SGBs over physical gold, thereby saving a 3% GST directly. Similarly, if you invest in REITs over physical real estate you can save up huge taxes by not having to pay stamp duty
Another good and intuitive way of saving up on transaction charges is to ensure a low churn. Churn in investing means exits and entries and hence having a low churn means you are not frequently paying the transaction charges which have taxes in it. One should always invest a large part of their portfolio from a long-term perspective wherein they can park their funds for a minimum of 8-10 years.
Now, we shall dissect the taxes arising on gain of investments:
If you fall in the low tax bracket, you should make sure to avoid paying TDS on your investments, so as to maximise your returns. For example, while making an investment into FD, you can claim tax exemptions by filling in form 15G and/or 15H with your bank.
If you are someone who comes under higher tax bracket, then you can use the following guidelines to save on taxes across each asset class
Fixed income investments
- Instead of booking FDs under your name, you can book them in the name of an immediate family member who is in the low tax bracket. This will mean that you can save on the tax of interest income that would be applicable if you did the investment in your name
- Invest your capital into PPF and other tax-free debt instruments like tax-free bonds.
- If you have a higher risk-appetite, you can consider investing into Equity Savings Fund which have an equity exposure of up to 30% but are still taxed as equity capital gains and not at your income tax slab rate
- For a time horizon of greater than 3 months, prefer putting your money in tax efficient arbitrage funds over liquid funds or savings accounts.
- Invest into ELSS which come with an 80C deduction of up to ₹1.5 lakhs.
- Holding stocks for more than 1 year can help reduce the tax levied, as such holdings are taxed at 10% (Long Term capital gains tax) instead of 15% (short term capital gains tax).
- Tax-loss harvesting should be practised, wherein you realise capital losses (on underperforming stocks) to offset capital gains and reduce tax liabilities.
- Invest in the growth plan of mutual funds instead of the dividend plan. In such a way, your capital keeps on accumulating and you save on the taxes on dividends. If you do require funds regularly, you can always set up a Systematic Withdrawal Plan (SWP) on your investments.
Prefer investing into schemes like SGBs instead of buying physical gold. With SGBs, you save 3% GST on purchase, and the gains at maturity are completely tax-free. Additionally, there is no need to worry about the safety and storage of an SGB, as opposed to physical gold.
Real estate investments
For making a real-estate investment, one can invest through REIT (Real-Estate Investment Trusts). REITs are companies managing and operating income-producing real estate. Investments in such companies help secure an investment into the real-estate (where the REITs invest/hold), and also earn rental income in the form of largely dividend payouts.
REITs also ensure easy and high liquidity, as opposed to traditional forms of real-estate, where the capital gets locked-in until the sale of the entire land is executed.
On a concluding note, one must not make investments from a taxation perspective however when one has decided on making an investment one must plan it such that tax costs are low and wealth can compound for long term. The key aspect is to keep investments simple and optimised.
Akshar Shah is the Founder of Fixed.