Planning to invest in gold or FDs? Know the tax aspects that will affect your return

Risk-averse investors avoid fluctuations in the capital invested and always look for financial instruments that give fixed and preferably guaranteed return. However, factors like taxation and inflation impact the seemingly fixed return. So, before investing you should know how much of your fixed return would be eaten up by income tax.

Gold

Gold is one of the most preferred assets of Indian investors. Apart from its use as jewellery, gold also acts as a buffer through value appreciation at the time of economic and market turmoil. So, it is advised that gold should comprise around 20 per cent your total investment portfolio.

Following are the tax implications of investing in gold or gold bonds.

Gold bullion and ornaments:

Short-term capital gain (STCG) is taxed at the marginal rate in which the investor falls

After holding for three years, the return is treated as long-term capital gain (LTCG) and is taxed at 20 per cent after indexation

Gold bonds

Small interests received during the investment period are taxed at slab rates

Short-term capital gains are also taxed at marginal rates

After holding for one year, the return is considered as long-term capital gain and is taxed at 10 per cent

No indexation benefit is allowed on LTCG as gold bonds are interest-bearing instruments

Debt/fixed income instruments

Apart from gold, the most preferred investment avenues of risk-averse investors are fixed deposits (FDs) and other fixed income and debt instruments.

Following are the taxation rules on such instruments.

Savings bank accounts

Interest up to Rs 10,000 is tax-free, and any interest above this limit is taxed at slab rate

As TDS is not deducted on savings interest, the tax payer has to mention it in the ITR

Fixed deposits

The interest received is taxed at slab rate without any limit

TDS will be deducted at 10 per cent, if interest in any financial year crosses Rs 10,000, unless Form 15G or 15H is submitted. However, in the 2018 Union Budget, it has been proposed that the tax-free limit for senior citizen will be increased to Rs 50,000 for interest earned on FDs and Post Office deposits.

Recurring deposits

The entire interest received is taxed at slab rate

TDS is not deducted on RD interest and it is the investor’s duty to reveal it in ITR

Tax-free bonds

As the name suggests, the entire interest on such bonds will be tax-free

Short-term capital gain is taxed at marginal rates if the bond is sold before one year

After holding for one year, the LTCG is taxed at 10 per cent

No indexation benefits are allowed as such bonds are interest-bearing instruments

Normal bonds and debentures

Entire interest received is taxable at slab rate

TDS is cut at 10 per cent, if interest in any financial year crosses the Rs 5,000-mark

STCGs on bonds and debentures are taxed at marginal rates

After holding for one year, the returns are considered as LTCGs and are taxed at 10 per cent

As investments in bonds and debentures are considered as interest-bearing instruments, no indexation benefits are allowed