How are debt investments taxed?

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It's crucial to take a look at the tax implications of any instrument before investing.

How are debt investments taxed?

Debt investments involve parking money in assets that promise to return the principal plus interest. Individuals usually get a higher interest rate by agreeing to keep their money on deposits for a longer period. Some of the common debt investments are fixed deposits, debt mutual funds, and National Savings Certificates (NSCs).

But before investing in any of these assets; it's important to understand their taxation.

Fixed deposit

Fixed deposits or FDs, also known as term deposits, are one of the best options for people looking for a risk-free assured income. Under certain instances, the FD interest becomes subject to tax deducted at source (TDS) deduction.

According to experts, if the total interest income earned from FD exceeds Rs 40,000 (in the case of resident senior citizen Rs 50,000), then the payer is liable to deduct TDS while paying or crediting interest in the account.

It is to be noted that the limit of Rs 40,000 (or Rs 50,000) is calculated, including all the bank branches and not just a single branch.

Debt mutual fund

Debt mutual funds are pooled assets that invest in fixed income securities like bonds, government securities, and Treasury Bills. Investors can get short-term capital gains here on redeeming the debt fund units within a holding period of three years.

These gains are added to the taxable income and taxed at the income tax slab rate, according to ClearTax. Long-term capital gains are realised when investors sell units of a debt fund after a holding period of three years. These gains are taxed at a flat rate of 20 percent after indexation. Also, investors are levied with applicable cess and surcharge on tax.

National Savings Certificate (NSC)

In the case of NSC, the interest is compounded annually but payable at maturity. Deposits in the National Savings Certificate qualifies for deduction under Section 80C of the Income Tax Act.

However, as the maturity period of NSC is five years, the interest can be re-invested only for four years. The interest earned in the fifth year comes in the hand of the investor with the maturity amount. So basically, the tax benefit is availed only on the initial first four years of the investment period. The interest earned in the fifth and final years is taxable, according to Tax2Win.

Disclaimer: The views and investment tips expressed by investment experts on CNBCTV18.com are their own and not that of the website or its management. CNBCTV18.com advises users to check with certified experts before taking any investment decisions.

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