Investment Income Taxes in India: What You Must Know

• From April 2020, dividends are taxed according to your income tax slab rate.

• Companies also deduct TDS on dividends exceeding the threshold amount.

• Interest earned from savings accounts, fixed deposits, and bonds is taxable according to your income tax slab.

• Interest from PPF and tax-free bonds is exempt from taxation.

• Short-term capital gains (STCG) are taxed at 15% (if STT is applicable).

• Long-term capital gains (LTCG) are taxed at 20% or 12.5% for equity shares above ₹1.25 lakh.

The income you earn from investment is taxable in most cases, depending on the type of investment and the type of income. Knowing these rules of investment income taxes in India is important to ensure you adhere to them and do not face any consequences. 

Being aware of the potential taxes will also help you plan your finances better and make the most of your funds. Learn more about the different types of investment income and their taxation here.

Since there are different investment avenues, there are several types of income, too. The difference in these incomes is based on the type of investment, the duration, and more. These incomes are generally bifurcated into four categories. Here is a brief overview of them and their tax rules:

You receive this income from your investment in mutual funds or stocks. These dividends are generally the profits or a part of it that the companies divide among their shareholders. They are typically paid in cash but can also be in the form of bonus shares or other assets.

• Before the Finance Act of 2020, dividends received were exempt from taxation.

• After the introduction of the Finance Act of 2020, any dividends received on or after 1st April 2020 are taxable.

• The tax rate depends on your income tax slab rate.

• The companies will also deduct TDS from dividends if the yearly amount exceeds the threshold.

In India, you earn interest from various investment avenues, like fixed deposits, recurring deposits, savings accounts, PPF, bonds and more. The key difference in dividends vs interest is that the former is a part of the profit whereas the latter is the amount you earn for lending money to the institution.

Tax Rules: 

• Interest from deposits and bonds is taxable as per your tax slab rate.

• Interest from a savings account is taxable as per your slab rate if the amount exceeds ₹10,000.

• Interest earned from PPF and tax-free bonds is tax exempt.

• TDS is deducted at 10% if the interest from deposits exceeds ₹40,000 (₹50,000 if you are a senior citizen).

• TDS will be deducted at 20% if a PAN is not available.

When you sell an asset, the profit you earn is termed as capital gains. The capital gains tax depends on whether it is short-term capital gains (STCG) or long-term capital gains (LTCG). 

The main difference in short-term vs long-term gains is when you sell the asset. If you sell it within 12 or 24 months, depending on the type of investment, it is STCG. If you sell after this period, it is LTCG.

Tax Rules: 

• If security transaction tax is applicable in STCG, the gains are taxed at 15%.

• If there is no security transaction tax, the gains are taxed as per your income tax slab rate.

• LTCG is taxed at 20% unless it is from the sale of units of equity-oriented shares or equity shares.

• LTCG is taxed at 12.5% for gains above ₹1.25 lakh from the sale of equity shares or units of equity-oriented shares.

Adhering to the taxation rules is crucial to ensure you don’t have a hefty penalty. There are several ways you can ensure that you don’t miss anything crucial. Here are some easy tips:

• Maintain proper records of investment, income, and expenses to get accurate numbers.

• Visit the official website of the Income Tax Department to ensure you stay updated with the latest changes and announcements.

• Use the available tools and assistance to file taxes accurately and easily.

• Contact professionals, like tax consultants, to get the right advice and make sure you don’t miss anything.

There are many rules for investment income taxes in India and keeping them in mind will help you better plan your investment and finances. You can also implement some tax-saving strategies that will help in minimising tax liability. 

Some of these options are investing in schemes like ELSS, NPS, ULIP and more. With proper planning, you can adhere to the tax rules and save on taxes while meeting your goals.

1. How are dividends taxed in India?

Any dividend you earn from 1st April 2020 is taxable as per your tax slab rate. Additionally, companies will deduct TDS if the yearly dividend amount exceeds the mentioned limit.

2. Is interest income from savings accounts and fixed deposits taxable?

Yes. Interest from savings accounts and FDs is taxable as per your income tax slab. Interest over ₹10,000 from a savings account is taxable.

3. What is the TDS rule for interest income?

Banks deduct 10% TDS if your total interest from deposits exceeds ₹40,000 (₹50,000 for senior citizens). If you don’t provide a PAN, TDS is deducted at 20%.

4. Are interest earnings from bonds taxed differently?

 Yes, the taxation depends on the type of bond from which you earn the interest. For instance, if it is a regular bond, the interest will be taxed as per your tax slab rate. In the case of tax-free bonds, the interest is not taxable, but capital gains are. 

5. How do I report investment income on my taxes?

You will need to file the applicable ITR form depending on your investment income and general income. You will also need to file additional forms like Schedule CG, Schedule 112A or others, depending on the type of investment income.