According to financial advisers and specialists, any investment portfolio should include both equity and debt products. Debt investments are generally considered to be safer and have mild returns, while market-linked equity investments can have high risk and returns. Debt safeguards the portfolio from market fluctuations because it is unaffected by them. Considering this factor, if we take an example of a debt investment then fixed deposits of banks are the most secure one, and it is preferred first by all types of investors when it comes to investing in debt instruments. But since the last 2 years, investors are looking for alternatives after banks have been slashing FD rates. So when choosing a debt product, it is suggested to consider factors such as security of returns and tax consequences. Hence, here we are going to discuss the most popular debt investments and their tax implications.
Debt Mutual Funds
Debt mutual funds invest in fixed-income assets such as bonds and other debt instruments in order to maximise returns for investors. This determines the returns earned by mutual fund investors. Debt funds are excellent at meeting short-term investment objectives and have a low-risk ratio. Debt mutual funds are known to be much less risky than equity mutual funds as they invest in fixed income instruments. When you withdraw your debt mutual fund units within a three-year investment term, you get short-term capital gains. This income is applied to your taxable income and taxed as per your tax slab rate. Under section 111A, short-term capital gains on debt maintained for less than a year are taxed at the same rate as regular income. Long-term capital gains on debt maintained for more than a year are subject to indexation and are levied at a rate of 20% under section 10 (38).
Individuals must pay tax on interest earned on bank fixed deposits. If the interest earned for the year exceeds a certain threshold which is Rs 50,000 in the case of senior citizens and Rs 40,000 in the case of non-senior citizens, banks are allowed to subtract TDS at a rate of 10% and the TDS rate on fixed deposit interest is 20% if you do not your PAN details to the bank. Senior citizens who seek a deduction must disclose on their tax return (ITR). Interest income must be recorded under the heading "Income from other sources," and senior citizens can claim a deduction under Section 80TTB. You can submit Form 15G/15H if your gross income for the year is less than Rs 2.5 lakh. if your income does not slip within the taxable slabs, the bank will not subtract TDS and you will not be eligible to pay any tax. To stop the inconvenience of additional TDS deduction and ultimate refund from the IT Department, you must submit these forms at the beginning of each fiscal year.
National Savings Certificate
The National Savings Certificate is a government-backed fixed-income investment scheme that is provided by post offices. This debt instrument is suitable for investors who want to get fixed income returns along with tax benefits as it is a secure and low-risk product to bet on. The interest rate is revised quarterly and currently, NSC is promising an interest rate of 6.8% per annum. The principal deposited in NSC counts for tax benefits under Section 80C of the Income Tax Act up to Rs. 1.5 lakhs annually as any other tax saving schemes such as 5-year tax-saving fixed deposits.
Post Office Time Deposit
Under small savings schemes of the post office, the National Savings Time Deposit Account is identical to bank fixed deposits. Depositors can open a time deposit account for one, two, three, or five years. The Government of India adjusts the interest rate on post office term deposits per quarter. Interest is measured quarterly and paid once a year. This debt instrument currently offers a return of 5.5 per cent for 1 to 3 years and 6.7 per cent for 5 years. Only a 5-year post office time deposit account qualifies for income tax benefits. Investors will be entitled to claim tax benefits up to Rs.1.5 lakh under Section 80C of the Income Tax Act, 1961.
Senior Citizen Savings Scheme
The Senior Citizens Savings Scheme (SCSS) is a secure debt instrument only for senior citizens who are above 60 years of age. The scheme provides only secure returns but also allows to claim tax benefits, rendering it an excellent investment option. The interest rate on the Senior Citizen Savings Scheme (SCSS) for the first quarter (April-June) of FY 2021-22 is 7.4 per cent per annum. It is one of the highest interest rates among other small savings schemes. SCSS is liable for a tax deduction of up to Rs. 1.5 lakh per year under section 80C of the Income Tax Act. If net interest in all SCSS accounts in a fiscal year crosses Rs.50,000/-, interest is taxable, and TDS at the specified rate is deducted from the overall interest earned. If form 15 G/15H is submitted and the earned interest does not exceed the specified limit, no TDS will be deducted.
Public Provident Fund
Because of its many related advantages, the public provident fund (PPF) is a prominent investment fund among investors. It's a long-term investment option that appeals to those who want to seek tax benefits while maintaining a steady interest income. Individuals with a low-risk appetite can consider a public provident fund scheme to invest for a 15-year of lock-in term. Since this scheme is backed by the government, it is accompanied by assured returns to meet an investor's financial needs. The current PPF interest rate is 7.1 per cent, and it is subject to quarterly adjustments by the government. The Exempt-Exempt-Exempt (EEE) category includes a variety of investment vehicles, including the PPF. This means that the principal amount, the maturity amount, and the interest received is tax-free. It should be noted, though, that the maximum amount of money that can be invested is limited to Rs 1.5 lakh per annum.