- Date : 25/06/2020
- Read: 5 mins
- Read in : हिंदी
Here’s a look at some popular investment options, and the corresponding tax rules you need to be aware of.
The coronavirus pandemic has taken a serious toll on the economic situation. Many organisations have been forced to lay off employees or reduce salaries. Understandably, many of us are grappling with financial issues. While the household income has been hit, living expenses, mortgage rent, loans, etc. continue to accrue as before.
To make up for any shortfall, people are being forced to dip into their savings and investments. If you too are considering making withdrawals from various investments, be mindful of any penalties or tax implications that might increase your tax burden.
Let’s look at some popular investment options, and the corresponding tax rules you need to be aware of.
Public Provident Fund (PPF)
PPF is a popular investment tool that falls under the exempt-exempt-exempt (EEE) category, where the investment, accumulated interest, as well as withdrawal are exempt from tax. The investment falls under Section 80C of the Income Tax Act and allows you a deduction of up to Rs 1.5 lakh in a financial year.
PPF has a lock-in tenure of 15 years; but you can make partial withdrawals from the account after five years. The maximum amount you can withdraw is capped at 50% of the accumulated balance at the end of the fourth year.
You can prematurely close a PPF account, but this is permitted only for the treatment of a life-threatening disease. Withdrawals from the PPF account are exempt from tax; so this won’t have any additional bearing on your tax liability.
Related: How to withdraw your PF online
Employees’ Provident Fund (EPF)
EPF functions similar to a PPF, but the lock-in duration is shorter at just five years. Partial withdrawals from an EPF are permitted in case of an emergency. Considering the pandemic, EPFO has allowed its subscribers to withdraw up to three months of basic salary and dearness allowance or 75% of the funds in the account, whichever is lower.
There are no tax implications for the subscribers; withdrawals can be conveniently made online by activating your Universal Account Number (UAN) through the EPFO portal.
National Pension Scheme (NPS)
Like the Provident Fund options, NPS too comes under the EEE category. It matures on the subscriber’s retirement, or on reaching the age of 60. On maturity, 40% of the corpus has to be compulsorily invested in an annuity, while the balance 60% can be withdrawn by the subscriber.
Partial withdrawal from NPS is allowed for specified purposes like building a house, medical emergency, paying for children’s education/marriage, etc. A subscriber is allowed a maximum of three premature withdrawals (with a minimum interval of five years between them) before maturity not exceeding 25% of the corpus and only valid after the third year of subscription.
Coronavirus has been classified as a critical illness, so NPS subscribers will be able to make partial withdrawals for their treatment (if diagnosed), subject to the condition mentioned above.
Bank/Post Office Fixed Deposits (FD)
The principal investment in an FD is not taxable, but the interest income is. The quantum of tax depends on the assessee’s overall tax bracket. Though premature withdrawals are allowed on term deposits, the bank or financial institution will offer interest based on the duration for which the deposit has been held. It may also levy a penalty (as a percentage) on the interest amount.
The terms will vary from bank to bank, so it’s best to speak with your bank’s representative to understand the penalty if any.
National Savings Certificate (NSC)
NSC is a government-backed savings instrument offered through post offices across the country. The returns on an NSC are fixed, but the total interest is not exempt from tax. The maturity period depends on the specific issue invested in. For example, NSC VIII has a maturity period of five years whereas NSC IX has a 10-year investment period.
To make withdrawals from NSC, you will have to get a pledge from a gazetted government officer. If only one year has elapsed since purchase, no interest will be paid out. Withdrawals post this period will be payable with capital plus interest, which is taxable at the subscriber’s overall tax bracket.
Stocks and Mutual Funds
The tax implication on selling stocks or equity-based mutual funds depends on the period of holding. If the said units have been held for a period of less than 12 months, a short-term capital gains (STCG) tax of 15% will be applicable. For a holding period greater than a year, long-term capital gains (LTCG) tax at 10% without indexation benefits will prevail. However, this tax is applicable only if the gains in a financial year exceed Rs 1 lakh.
On the other hand, sale of liquid/debt-based mutual funds will be taxed at the applicable tax slab for short-term gains and at 20% for LTCG.
It is crucial that you consider making a withdrawal from an investment only if it’s absolutely necessary and for essential expenses. If you decide to make any withdrawals, watch out for any penalty charges or additional tax liabilities so that you’re not caught off guard later. There is a good chance that the government may provide some relief on penal charges or tax breaks on capital gains so as to provide a little extra liquidity in the hands of investors. Besides this, check these 9 Financial products and their tax benefits.