Tax on shares, funds and other investments

In simple terms

Investments produce returns in two ways, and the tax system treats them differently:

• Income while you hold the investment: interest on deposits and bonds, dividends from shares and funds, distributions from REITs and InvITs.
• Capital gains when you sell for more than you paid; capital losses when you sell for less.

This lesson explains the principles that decide how much tax you pay. It deliberately does not state current rates or limits, because they are set by law and change from time to time. Use the examples' made-up rates to understand the method, then take the current rules from the Income Tax Department.

Income from investments

• Interest on deposits, savings accounts and bonds is generally added to your income and taxed at your own rate. Banks and other payers may deduct some tax before paying.
• Dividends from shares and mutual funds are generally taxable in the hands of the investor as income.
• REIT and InvIT distributions can be made up of different parts, such as interest, dividends and repayment of capital, each treated differently, as the REITs and InvITs lesson explains.

Because interest is usually taxed at your own rate, its after-tax return can be much lower than its headline rate for people in higher tax brackets.

Capital gains

When you sell, the gain is the sale price minus the cost of buying, with allowable expenses such as brokerage taken into account, as the trading costs and taxes lesson explains. How it is taxed depends on two things.

The type of investment. Tax law sorts investments into categories, for example listed shares and equity-oriented funds, other mutual funds, bonds and debentures, gold, and property, and treats the categories differently. The definitions of these categories, such as what counts as an equity-oriented fund, are set by the law.

The holding period. For many categories, gains on investments held longer than a period set by law are treated as long-term and taxed differently, often more lightly, than short-term gains. The period differs by category.

Losses

Capital losses can often be set off against capital gains, subject to rules about which kinds of loss can be set off against which kinds of gain, and how long unused losses can be carried forward. Records of every purchase and sale, such as contract notes and fund statements, make this possible.

Tax in investment decisions

• Holding period: selling just before an investment becomes long-term can cost more tax, as the trading costs lesson notes.
• Rebalancing: selling to rebalance can trigger tax, so using new money to rebalance can help, as the rebalancing lesson explains.
• Turnover: frequent trading turns potential long-term gains into short-term ones and multiplies costs.

But tax should rarely be the main reason for an investment decision. An investment that suits your goals and risk is usually better than one chosen mainly to save tax.

Why the rules change

Investment taxation is set by the Income-tax law and is often changed, frequently in the annual Budget: rates, holding periods, categories and exemptions have all changed over time. Treat any rule you read, including in older articles, as something to check, not something to rely on.

Why it matters

Tax can take a meaningful share of returns, and its rules affect when it makes sense to sell, how to rebalance and which investments suit which goals. Understanding the structure lets you ask the right questions; checking the current rules each year gives you the right answers.

Limitations

This lesson explains general principles for individual resident investors and uses made-up rates. Actual rules depend on the law in force, your residency, your total income and the specific investment. For significant decisions, consult the Income Tax Department's guidance or a qualified tax adviser.

Common mistakes

• Relying on old articles for rates and holding periods.
• Comparing pre-tax returns on investments taxed differently.
• Letting tax drive decisions that should be driven by goals and risk.
• Not keeping records of purchases and sales.

Try it yourself

1. List your investments and note, for each, whether it produces income, capital gains or both.
2. Find the current rules for each category on the Income Tax Department's website.
3. Redo the made-up calculation above using the current rules and your own figures.
4. Note any holding whose tax treatment would change if you held it a little longer.