One of the common mistakes made by many newbie investors is that they concentrate heavily on the returns and risk and overlook the taxation involved before investing. Taxation is a vital part of any investment. This blog will talk about the different types of stages of investmentand their classification, how investors are categorized.
Different stages of investments and how taxation works at each step:
There are three types of investment stages, and they are:
Investment stage: Because the investment is made in the initial stage, there is no tax. There is, however, the possibility of tax savings under Section 80C, which allows for tax-free investments of up to 1.5 lakh.
Income-generating stage: During this period, you begin to profit from your investments. Interest may be taxed or exempted under specific circumstances. Interest on the fixed deposit schemes is taxed irrespective of the tax slabs of the investor, Interest eared Public Provident Fund (PPF) is not taxed, Dividends on equities are tax-free.
Withdrawal stage: Some investments may be taxed or exempted when they reach maturity. Short-term stock investments that are sold within a year are taxed. Non-equity mutual funds are taxed according to the existing tax slab of the investor.
Taxation works differently for each investment, and based on the three steps mentioned above, the earning from the different investments are categorized into:
EEE: Exempt –> Exempt –> Exempt All investments under this type are tax-exempt during all three investment stages. Popular investment products include EPF, PPF, etc.
EET: Exempt –> Exempt –> Tax This type generally consists of Withdrawals and is taxed at a marginal rate. E.g., NPS.
ETE: Exempt –> Tax -> Exempt In this type, the investments are taxed only on the income earned during the tenure. Examples include NSC and SCSS.
TEE: Tax –> Exempt – > Exempt Investments are not tax-exempt early, but the income generated and withdrawal is exempted from tax. Famous examples are stocks, equity, and balanced funds.
TET: Tax –> Exempt -> Tax Only the interest income is tax-exempt—for example, non-equity hybrid funds and debt funds.
TTE: Tax –> Tax -> Exempt Tax is not levied on maturity but is applied to the Interest earned. Common examples for this type of investment are fixed deposits (FD) and recurring deposits(RD).
Categories of Investors and how taxation works for them:
The investors are classified into four categories based on their earnings and their age.
High and mid-income-tax bracket investors (less than 60 years):
Exemptions from taxes are critical for this group of investors. Their primary goal should be to save money on taxes during the first investment phase by taking tax breaks. EEE, EET, and ETE investments can aid in the acquisition of first refunds in this circumstance. When combined with traditional options such as TEE and TET, it is possible to build money.
Low-income investors (less than 60 years):
Tax exemptions aren’t necessary because a small investment in EEE investments is sufficient. They would be better suited to investing in wealth accumulation instruments, such as those classified as TEE or TET.
Retirees, especially those over the age of 60, are entitled to higher tax breaks than their younger colleagues. The Senior Citizens Saving Scheme, which falls under ETE, would be more beneficial to them. Bonds and debt instruments are tax-free and have a low-risk profile. These are classified as TEEs.
Non-tax paying investors:
Because tax does not play a substantial role for investors in this category, the focus for such investors who are youngsters or low earning investors, the focus on them is based on wealth generation investments through TEE and TET.
With that all being said, taxation on earnings from an investment may vary from case to case. The best suggestion for you is to get expert suggestions before investing. We at Tradeplus will be delighted to help you with all your investment-related needs and queries.