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Taxes can be a complicated subject for many. This is not surprising since there are several investments whose tax treatment remains ambiguous, leading to debate, dilemma and disappointment for investors.
Here, we clear the air around the tax liability of four such investment avenues.
Multi-asset funds
As the name suggests, multi-asset funds invest across more than one asset class. Typically, these asset classes are bonds, gold and stocks. For the same reason, multi-asset funds are branded as a 'one-stop' solution for investors looking to diversify their portfolios.
These funds have started gaining traction since last year on the back of gold's strong performance, delivering returns of over 14.45 per cent in 2023 and a general apprehension whether equity markets would sustain its high in the long run.
Last year, six new multi-asset funds were launched, and this category attracted net inflows of Rs 20,000 crore till November 2023.
Although multi-asset funds are considered lucrative, their tax treatment might be a spoilsport. We explain why.
As per Value Research classification, 31 funds currently exist in the multi-asset category. Of these, 14 are Fund-of-Funds (FOFs). As per discussions with various tax experts, these FOFs are taxed in the same manner as non-equity-oriented funds.
The tax liability for the remaining 17 funds depends on their average equity allocation in the last 12 months. These funds will be taxed like equity funds only if their equity allocation exceeds 65 per cent. An important point to note is that for funds that are less than 12 months old, their equity allocation since inception should be considered during taxation.
Going by the above treatment and excluding the funds that haven't completed one year, six funds in this category currently qualify for tax treatment similar to equity funds owing to an equity allocation higher than 65 per cent.
NPS Tier II
National Pension System (NPS) is a defined-contribution plan to provide pension benefits to all Indian citizens. You can open two types of accounts under NPS - Tier I and Tier II. While Tier I accounts are mandatory for all individuals who want to subscribe to NPS, opening a Tier II account is entirely voluntary.
One of the reasons why NPS Tier II plans are a popular investment option is because they don't have a lock-in period. This makes them the closest alternative to mutual funds among all market-linked investment options. Their low cost is an added advantage as well.
However, their taxation is unclear. Tax consultants suggest treating NPS Tier II plans like non-equity-oriented funds, even if they invest 100 per cent of the assets in equity.
We hope this year's budget rectifies this anomaly, but till then, we suggest you avoid investing in NPS Tier II.
Sovereign Gold Bonds (SGBs)
If you are keen on investing in gold, consider buying SGBs. An additional 2.5 per cent yearly return and capital gains tax exemption make SGBs way more attractive than gold ETFs (exchange-traded funds) and physical gold bars.
SGBs come with a maturity period of eight years, after which they are redeemed at the prevailing gold rate. It is important to note that the capital gains on selling SGBs remain tax-free only when you sell them directly to the RBI (Reserve Bank of India) upon maturity and not in the open market.
However, it remains unclear whether the tax exemption will still be applicable if you sell your SGBs to the RBI before maturity. For the uninitiated, RBI allows you to sell SGBs to it after a five-year holding period.
The tax experts we spoke to believe the exemption is granted upon selling to RBI upon maturity only (eight years).
Dividends earned from international stocks
An increasing number of Indian investors are looking to diversify their portfolios by buying stocks of foreign companies. However, a common concern among investors is when international governments charge tax on dividends earned from these investments.
Moreover, do investors also need to pay tax on dividends in India? Here's some good news for you. You can claim the credit on tax paid for dividends earned abroad, even if there is no Double Taxation Avoidance Agreement (DTAA) with a country.
But remember that dividends are taxed at the income tax slab rates in India, and the maximum offset that can be provided is the amount of tax payable in India. Any excess tax paid in the foreign country is ignored.
Let's take an example to understand this better. Suppose you invested in Apple's stocks in the US and earned a dividend of 100 per share (converted amount). Assuming a 20 per cent taxation on the dividend, you pay Rs 20 per share as tax in the US. Further, if you fall in India's 30 per cent income tax bracket, you would have to pay Rs 30 per share as tax on the dividends. However, since you have already paid Rs 20 for each share as tax in the US, you would only have to pay the excess amount in India, Rs 10 per share as tax.
Our take
There is no denying that taxes are complicated. And ambiguity makes them even worse. However, this shouldn't stop you from investing. Other factors, such as your investment horizon, risk appetite and investing goals, are more important and should be considered.
Also read: How to reduce tax in the new tax regime
This article was originally published on January 06, 2024.
Disclaimer: This content is for information only and should not be considered investment advice or a recommendation.
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