Q. I am a 21-year-old medical student. I have started a recurring deposit (RD) with the ₹1,000 that I save every month. Now, I want to start investing. What options would you suggest? Am I eligible to invest in stocks and mutual funds (MFs)? Since investment gains are subject to taxation, what rules will I be subjected to if I start investing at this age?
A. As you are 21 and a major, you can certainly invest in any instrument of your choice, including shares and mutual funds, irrespective of whether you are employed or not. You will, of course, need to meet the KYC requirement specified for each type of investment. Usually, if you have a PAN card and an Aadhaar for proof of address, this should suffice for most investments, along with the account opening form.
Apart from bank RDs, you can consider small savings schemes operated by India Post. These are absolutely safe investments backed by the Government of India. India Post offers 1-, 2-, 3- and 5-year fixed deposits, a recurring deposit account, a 5-year monthly income account, a 5-year National Savings Certificate where your interest compounds until maturity, a 15-year Public Provident Fund and many other options that offer a guaranteed return.
There are also deposit products from Non-Banking Financial Companies such as HDFC and Sundaram Finance that offer fixed returns if you lock in for 1,2,3 or 5 years. The interest you earn on both post office schemes and NBFC deposits are treated as your income and taxed at the income tax slab rate applicable to you each year.
MFs are riskier investment vehicles that deliver returns based on movements in market prices of the assets they invest in. You can invest either through monthly instalments (called Systematic Investment Plans or SIPs) or through one-time investments. There are different types of MFs carrying differing risk profiles, from those that invest in large-, mid- and small-cap stocks to those that invest in safer options such as bonds. The key advantage of open-end MFs is that they offer anytime liquidity as you can sell your units to the MF whenever you need to exit. The dividends received from MFs are taxed in your hands at your I-T slab rate. The capital gains are taxed as short-term or long-term capital gains, based on how long you hold the fund.
When you buy shares, you get to own a share of the business which entitles you to dividends from the company and share price appreciation, if any, when you sell the shares. Dividends are taxable in your hands as income and capital appreciation as short term or long-term capital gains (after one year of holding).
As you have no income from an occupation, you will need to add up all your incomes from stipend, dividends from MFs and shares, interest from deposits and short-term capital gains from any sale of MFs and shares to arrive at your gross taxable income. If your taxable income is up to ₹2.5 lakh in a year, you are not liable to pay any I-T. For income beyond ₹2.5 lakh up to ₹5 lakh, you pay tax at 5%. For income beyond ₹5 lakh and up to ₹10 lakh, you pay tax at a 20% rate. To save tax, you can also invest in instruments under section 80C of the I-T, which allow you to claim up to ₹1.5 lakh in annual deduction from your gross taxable income. Certain post office schemes and ELSS MFs are eligible for this deduction. In effect, up to ₹4 lakh of your income can be exempt from I-T in a year provided you are able to use 80C effectively.
However, tax savings should not be your only objective while choosing investments. Before choosing them, you need to be clear on three things – the financial goals towards which you are investing, the time horizons you have to achieve them and your risk appetite which is your ability to take losses or volatility in your returns. For holding periods of 7 years or less, you must consider deposit products, post office schemes and debt MFs. You should venture into shares or equity MFs only if you have a 7-year-plus horizon. Finally, tax can be levied on your MF or stock market investments once you become a taxpayer, as and when you sell units or shares and make capital gains.
Q. I am a senior citizen (81). I redeemed MFs in January this year. The total capital gain received was ₹13.30 lakh. My annual income is ₹17 lakh, from other sources. Can I get tax exemption for capital gains u/s 54 EC?
N. Sree Kanth answers: With effect from April 1, 2019, capital gains arising from sale of land, building or both only are eligible for exemption under Section 54EC of the I-T Act, 1961. The capital gains in your case are arising from the redemption of MFs due to which they are not eligible for exemption under Section 54EC of the I-T Act. Depending on the nature of the MF redeemed, the tax treatment will vary and accordingly, will have to be included in your total income.
Q. Please clarify whether total income (taxable income) or gross total income is to be taken into consideration for filing I-T. returns. Also, is TDS applicable to each branch for bank deposit interest?
A. For filing returns for individuals under Sec. 139 of the I-T Act, total taxable income will be considered to determine it exceeds the maximum amount not chargeable to I-T.
Under Section 194A of the Act, the words ‘a banking company’ is used, due to which the limits for non-deduction applies to each banking company and not branch wise.
(N. Sree Kanth is partner, GSS & Associates, Chartered Accountants, Chennai)