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IMAPCTS OF TAXES ON INVESTMENT
As we know taxes play a vital role in investment decision making. Personal taxes
are levied on individual’s income under the head of salary, house property,
business and profession gain etc. Income from investment is also subject to tax.
However the rate of tax differs from investment to investment. Some income from
investment also exempt from tax such as tax free bonds.
Impact of Tax on Investment Decisions
The taxes paid on your investments can reduce the amount of money you
actually made up of a particular investment. For example, if you invest in a
stock and makes 15 percent on your money, you may be taxed on those
profits. If you are taxed on investment @ of 10 percent, then it really makes
only 13.5 percent on your money.
 How Investments income are Taxed
Dividends, interest, and rental income
Dividend from shares held in Indian companies and specified mutual funds
are exempt from tax. However in case of a Resident and Ordinary residents,
dividend income from investments outside India is taxable, subject to treaty
benefits. Expenses incurred specifically for earning such taxable investment
income are deductible.
Interest income earned in respect of the investments made in India is subject
to tax in India. Also, in case of a Resident and Ordinary residents, interest
income from foreign investment is taxable, subject to treaty benefits.
 Capital Gains
Some other investments are taxed as capital gains.
Real Estate
For real estate investments, a whole different set of rules apply. If for example,
Mr. Sharma is a resident individual and he sells a residential house on
12/4/2013 for Rs.25,00,000. He had purchased the house on 5/7/2011 for
Rs.5,00,000 and spent Rs.1,00,000 on its improvement during May 2012.
During the previous year, 2013-2014, his income under all heads excluding
capital gains was NIL.
Since the asset was held for less than 36 months, it is a short term capital
asset and the
Short-term capital gain = 25,00,000 – 5,00,000 – 1,00,000 = 19,00,000

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In case Mr. Sharma is selling the house on 12.3.2015 for the same price, then
he would’ve had the asset for over 36 months.
The indexed cost of acquisition will be 5, 00,000 X 852/711 = 5,99,156
The indexed cost of improvement will be 1,00,000 X 852/785 = 1,08,535
The long-term capital gain = 25,00,000 – (5,99,156 + 1,08,535) 707691 =
17,92,309
Tax benefits: Investmentin real estate in India can help you to savetax
deductions from your salary. When you own property, you can avail severaltax
benefits like HOA dues, repair interests, etc. Tax benefits are also available on
the interest rates of housing loans in India.
 Securities Transaction Tax
 All people do not report capital gains. Therefore, the governmentdoes
pay STT is inevitable.
 Itis paid the value of all securities traded through a recognized stock
exchange.
 Itmust be paid by the seller of a futures contracton the delivery date
on the value of the contact.
 An option seller pay STT on the prize and if the option is exercised then
the buyer mustpay STT on the value, i.e. ST * Number of options.
 STT in the cash segment is the F & O segment
Example:
• Supposeyou buy 100 shares of SBI @ Rs. 1700 per share.
• Itwill then pay 0.1% in this transaction as brokerageand STT @
0.025%(sameday).
• Now supposeyou sell this action @ Rs. 1,800 per shareafter two
months.
• Itwill then pay 0.1% in this transaction as brokerageand STT @ 0.025%.
• Since the period in which the calculation of capital gains is less than one
year, you will have to pay a tax on short-term capital gains at 15%.
Purpose of STT
Its purpose of is not to collect the revenue rather then it to get details
regarding the security related transaction done on stock exchange.

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Benefits: Available under sectionSec.10 (38)
If investor want to claim exemption on long term capital gain then all “3” conditions
must be fulfilled.
1. Equity, 2.long term, 3.security transaction tax should be paid.
All three conditions is necessary to fulfil for availing exemptions benefits
 How This Impacts Your Investment Choices
The different tax rates can have an impact on how you decide to invest. For
example, you may decide not to hold shares, becausethey will not be subject
to capital gains tax, or you can choose to avoid the daily exchange to prevent
their operations fromincome taxes as ordinary income. You may also prefer to
consider investment property, if you wanta morefree form of income tax.
Other people can also try to take advantage of investments or investments
that offer sometax advantages for deferred tax.
The impact of taxes on their investments in general depends on how much you
need to investand how much is a sophisticated investor. You should consider
talking to a financial adviser or an accountant or tax advisor if you have a lot of
money to investand are worried about how taxes affect profits.
you.
 Understanding the Impact
For the majority of investors and small business owners, taxes havea role in
how business decisions and investment decisions, but in the end the most
important thing is to determine whatinvestment or business decisions will
have best effect on his personalor corporatevalue. As you earn more money
and become a more sophisticated investor, the tax impact on investment and
business becomes more important, and get professionalhelp to reduce your
tax liability is generally recommended.
Some Tax Efficient Investment
Minimize taxes or avoid altogether, it plays an importantrole in
many investment decisions.Both looking at the tax burden this year
or think about the future, tax planning is a componentto determine
a combinationof investments.Although tax evasion should not
drive all investmentdecisions,you need to consider the tax efficient
investment . For the purpose of saving taxes.

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1.ELSS Tax Saving Mutual Funds
ELSS Tax Saving Mutual Funds offer highest returns compared to any other tax
saving investment plan in India.
ELSS Tax Saving Mutual Funds returns are not guaranteed. However, if you can take
some risk, you can earn amazing returns of 12% to 15% by investing in these funds.
ELSS Funds have lowest lock‐in period of 3 years. Investors can opt for dividend
option and get regular income even during the lock‐in period.
Investing in ELSS funds through SIP every month would help you reduce burden of
investing a lump sum, take care of market fluctuations and provide higher returns.
One should note that each month SIP would have lock in period of 3 years. E.g. if
your SIP starts in Jan‐17, the lock in period of 3 years ends in Dec‐2019.
However, your second SIP which you invested in Feb‐2017 would have lock in
period till Jan‐2020.
Since this is an equity mutual fund and investment period is 3+ years, returns /
capital gains from selling such funds are tax free.
Some of the top ELSS tax saving mutual funds are Axis Long Term equity fund,
Reliance Tax Saver fund, DSP BR Tax Saver Fund etc.
2. Public Provident Fund
Ministry of finance is reducing the PPF interest rates year on year. However, this is
still one of the best investment options to save income tax. If offers 8% interest
per annum. Govt. of India would keep updating this every quarter. The interest
rate indicated is for the period Oct‐16 to Dec‐16.
Interest received is tax free at maturity. PPF has lock‐in period of 15 years.
Investment up to Rs 1.5 Lacs per annum qualifies for IT Rebate under section 80 C
of Income Tax Act. Loan facility in PPF account is available from 3rd financial year
up to a 5th financial year. The rate of interest charged on loan shall be 2% per
annum above the interest paid.
Withdrawal permitted from 6th financial year.
Non‐Resident Indians (NRIs) are not eligible to take PPF. However, if they have
opened PPF whenthey were in India, NRI’s can continue to operate their PPF
account.
An individual cannot invest on behalf of a HUF (Hindu Undivided Family) or
Association of persons. Minimum investment is Rs 500 and maximum is Rs 150,000.
If you invest any amount beyond this amount, the amount would returned to your
account without any interest. You can invest in PPF every month. If you can invest
by the 5th of the month, you can get interest for the remaining period of the
month. PPF offers several good features and it is one of the best investment
options to save tax u/s 80C in 2017.
This is suitable for those who want tax savings and who want to accumulate funds
for retirement purpose or children education and want to earn safe and highest
returns. This is one of the best investment plans to save tax.
3. Tax Saving Bank FD Schemes
This is one of the old and best investment option to save income tax under section
80C of IT act. Currently after demonetization, interest rates have fallen. Current

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interest rates are between 5.5% to 7.5% per annum. Interest received from tax
saving bank FD schemes are taxable.
This plan has 5 Year Lock‐in period Some of the best tax saving FD schemes
offered by banks are :Ratnakar Bank – 7.7%, IDFC Bank – 7.5%, DCB Bank – 7.5% and
Union Bank of India – 6.5%.
4. Rajiv Gandhi Equity Saving Scheme (RGESS)
RGESS offers tax benefits for first time investors who are earning up to Rs 12 Lakhs
per annum.
Maximum investment allowed is Rs 50,000. Such amount can be invested in BSE100
stocks or RGESS Mutual funds.
50% of such invested amount qualifies for tax benefit u/s 80C. Means if you invest
Rs 50,000 in BSE 100 stocks or RGESS Mutual funds for the first time, you would get
tax exemption of Rs 25,000for the first time and only as one time. Means you can
get the maximum tax relief of Rs 7,725 (30% tax bracket).
Returns are not guaranteed as investments are made in stocks and RGESS mutual
funds.
5. New Pension Scheme (NPS)
This is another good investment option to save tax u/s 80C in 2017who are looking
to save for retirement.NPS returns vary. In last 5 years, several good NPS funds
gave between 12% to 14%. This is low cost investment option. The fund
management charges are very low at 0.0009% of investment value. You can invest
Rs 500 per month or Rs 6,000 per annum. There is no maximum limit for
investment in NPS. However, you can invest up to Rs 1.5 Lakhs in Tier‐I scheme
and get tax exemption u/s 80C.Investors have the choice to opt for allocation of
equity, bonds and gilts.
Maturity amount is taxable.
One has to do some homework before subscribing to NPS Scheme.
Beyond 80C, you can get another Rs 50,000 exemption by investing in Tier‐I
scheme u/s 80CCD.
6. National Saving Certificate (NSC)
National Saving Certificate is issued by Post offices and principal along with
interest is backed up by the Govt. of India. Hence, these are safe investment
options. NSC’s are available for 5 year period NSC’s are available for a minimum
investment of Rs 500 and in multiples of Rs 1,000 / Rs 5,000 / Rs 10,000 There is
no maximum limit for investment.
Interest rates are 8% per annum for the 5 year NSC. Interest is compounded every
half year. Interest received is taxable. You need to show this as other income
while filing ITR and pay income tax. However, such interest can be claimed again
as exemption u/s 80C (within the limit of Rs 1.5 Lakhs).
Means you would show as other income and exemption u/s 80C and need not pay
any tax on such interest.
Individuals, Joint and minor, supported by Guardian can invest NSC. Complete
guide on National Saving Certificate (NSC) would help you to take decision to
invest in this option or not.

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7. Unit Linked Investment Plan (ULIP)
After 2010 IRDA guidelines, Insurance companies have reduced ULIP
charges.
ULIP’s provide life risk coverage.
New ULIP policies have low policy / administration charges.
No guaranteed returns. It provides returns of 5% to 11% returns
depending on the scheme.
You should hold ULIPs for 10‐12 years to see good returns.
8. Life Insurance Plans
Life insurance is first step in any financial planning. One should prefer term
insurance plan as it comes with low costs and high risk coverage.
Term insurance plans come with no maturity value. These are designed for risk
coverage and not for money saving purpose.
Consider adequate insurance coverage based on 10 / 15 years
expenses / income.
Conclusion: These are the some tax saving schemes would help you to invest
under section 80C up to Rs 1.5 Lakhs and another Rs 50,000 under NPS Scheme
totalling to Rs 2 Lakhs. You need not consider all options. You can consider some
of these investment options which are best suitable to you based on your
investment tenure, risk appetite and features indicated here. These investment
can help to gain higher return with low risk, so we can say these investment plan is
better for investor as far as taxes is concern.

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How to select best investment?
As an investor need not ignore the tax implications in making investment
decisions. Of course, taxes are irrelevant in case of tax free investments such
as PPF, Tax free UTI bonds or investment in equity shares of Indian companies.
However, if the investment income is subjectto tax, the investor must find out
the after tax return on his investment and then this after tax return be
considered for decision making. Investors in the higher tax bracket should opt
for tax free investment.
In order to find out the total return from an investment, the tax implications of
capital gains/losses should also be incorporated. As a measureof tax planning,
investors can time the sale of investment. But all this depends upon the
relevant tax laws applicable at a particular point of time. What is required is
that the investors mustunderstand that taxes have a significant impact on
their return and should be carefully incorporated in the investment decision
process.
In order to compare alternative investments, one needs to take into
consideration the impact of taxes and comparethe alternative investments
benefits either pre-taxor post-tax.
Post tax rate = Pre-tax rate (1-Tax Rate)
Or alternatively
Pre-Tax rate = Post tax rate
(1-Tax rate)
Taxable Equivalent Yield: In caseof tax free investments no tax is to be paid
on the annual interest income. The interest income is exempt from tax in such
a case. Herewe can calculate taxable equivalent yield to compare it with an
investment the yield of which is taxable.
We can say “Taxable Equivalent Yieldis the equivalent pre tax yieldof a tax
free investment”.

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Formula: Tax free rate
(1-TaxRate)
To understand the impact of tax on investment decision.
Example: We supposetwo investment opportunities.
As we can see that these two investments are non- comparable because of their tax
implications. Hence to make them comparable we need to convert the returns of
investment 1 into a similar Taxable investment.
By considering that the return 8% is after tax if it is subject to tax @30% then the return
should be 11.42% (calculated)
Now these are comparable (both taxable)
Investor should invest in investment 2.
Investment 1
Tax free return @8%
Investment 2
Taxable @ 30%
Return @ 12%
Taxable equivalentYield =tax free rate = 0.08% = 11.42%
(1- Tax rate) (1-0.3)
Investment 1 Investment 2
Return @ 11.42% Return @ 12%
Not feasible although it This is more feasible
Is giving return option
@8% after tax

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Example: 2 we supposetwo investment opportunities.
As we can see that these two investments are non- comparable because of their tax
implications. Hence to make them comparable we need to convert the returns of
investment 2 into a Post Taxable investment.
Therefore post tax interest rate from investment 2 = Pre tax Rate (1- Tax Rate)
= 0.12(1-0.3)
= 0.084 or 8.4%
Now these two investments are comparable
Since 8.4 %< 9% which means investor should invest in investment 1.
“At the end we can say sometimes taxable investment is more beneficial than the tax free
investment, in above we see (example: 1) tax free investment is not always have
superiority over the taxable investment” and vice versa also applicable.
There are pros and cons to both products and it largely depends on what
you’retrying to do. If you have need for annual interest then you should invest
in tax free bonds or debt instrument(etc.) are probably better becausethey
will pay you annually interest here risk is lower than any security.
At the end we can say investor should analysethe impact of taxes beforedoing
investment in any securities. wheretaxable investment is better or tax free
investment
Investment 1
Tax free return @9%
Investment 2
Taxable @ 30%
Return @ 12%

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Bibliography
1. FundamentalofInvestment,Dr. Vanita Tripathi (published bytaxman)
First published edition:January2017
2. Investment Management,Dr. R.P. Rustagi (Published bySultan Chand
& Sons)
Sixth ThoroughlyRevised Edition
3. https://home.kpmg.com/xx/en/home/insights/2011/12/india-
income-tax.html