Smart things to know about tax on profit from an investment

1) The profit from sale of an investment is taxable as capital gain, which can be short term (STCG) or long term (LTCG), depending on the period for which it is held by the investor.

2) A capital asset held for less than three years before sale is a short-term capital asset. The exceptions are shares, bonds, units of UTI and mutual funds, where the holding period is less than 12 months.

3) The long-term capital gain gets the benefit of indexation, which means that the purchase price for calculating capital gain is adjusted for inflation over the holding period, reducing the capital gain for taxation.

4) The STCG for equity shares and funds is taxed at 15% and LTCG is exempt from tax. For all other securities and funds, it is taxed at the applicable rate, while LTCG is taxed at 10% without indexation, or 20% after indexation.

5) There are some investments, such as the PPF and life insurance policies, which also provide the benefit of tax-free proceeds on redemption or maturity.

6) The proceeds of pension plans offered by insurance companies are tax-free to the extent of one-third of the maturity value. The NPS proceeds are taxed if these are withdrawn instead of being invested in an annuity.

The content on this page is courtesy Centre for Investment Education and Learning (CIEL). Contributions by Sunita Abraham, Girija Gadre and Arti Bhargava.