Taxation of investment income

Taxation of investment income

In FY 2026-27 (Assessment Year 2027-28), resident individuals pay tax on investment income across four distinct streams: interest is taxed at slab rates under "Income from Other Sources"; dividends are taxed at slab rates with TDS deducted at source; capital gains carry special rates that vary by asset class and holding period; and rental income is assessed under "Income from House Property" after a 30% flat deduction. The new tax regime is the default for AY 2027-28, eliminating Section 80TTA/80TTB interest deductions and restricting housing deductions. Matching every income stream against the AIS before filing is the single most effective step to avoid a Section 143(1) mismatch notice.

Interest Income: What the Tax Department Sees — and When

Interest income is the most widely held investment stream and the most frequently underreported, because it reaches investors through multiple channels that rarely consolidate into a single bank statement.

What qualifies as taxable interest

All of the following fall under Section 56(2) and are taxable as "Income from Other Sources" at your applicable slab rate:

• Bank savings account interest
• Fixed deposit (FD) and recurring deposit (RD) interest — including accrued but unpaid interest in each year
• Post Office savings account interest and NSC/KVP accrued interest (reportable annually, not just at maturity)
• Corporate bond and Non-Convertible Debenture (NCD) coupon receipts
• NBFC deposit interest

TDS on interest: the thresholds that matter for FY 2026-27

Banks and financial institutions deduct tax at source under Section 194A before crediting interest. Key thresholds:

TDS being deducted does not discharge your obligation to report. The gross interest is your income; the TDS is a prepaid credit you claim in the return. If your PAN is not submitted to the bank, TDS is deducted at 20% instead of 10%.

Old regime vs new regime for interest

Under the old tax regime: savings account interest up to Rs. 10,000 is deductible under Section 80TTA for non-seniors; all interest (savings, FD, RD) up to Rs. 50,000 is deductible under Section 80TTB for senior citizens aged 60 and above. Under the new tax regime — the default for AY 2027-28 — neither deduction applies. A senior citizen earning Rs. 50,000 in FD interest who defaults into the new regime pays full slab tax on that amount; under the old regime, it would be a nil addition.

Dividend Taxation in FY 2026-27

Since the abolition of the Dividend Distribution Tax (DDT) with effect from FY 2020-21, dividends flow into the shareholder's hands as fully taxable income at their applicable slab rate.

How TDS is applied

• Section 194 (listed companies): TDS at 10% where annual dividend from a single company to a single shareholder exceeds Rs. 5,000.
• Section 194K (mutual fund income distributions): TDS at 10% where annual dividend from a single fund house exceeds Rs. 5,000.

If your PAN is not correctly seeded with the company's Registrar and Transfer Agent (RTA) or with your depository participant, TDS is deducted at 20%. Check your CDSL or NSDL demat account to confirm PAN seeding is current — a small administrative step that halves your TDS burden.

The AIS problem with dividends

Dividend data in the Annual Information Statement (AIS) on the Income Tax portal (incometax.gov.in) is reported company-by-company and folio-by-folio. Investors who hold twenty-plus stocks or multiple mutual fund folios sometimes find the AIS dividend section runs to several pages, aggregating to a significant taxable sum — yet omit it from the return because they tracked only bank credits. Consolidate the AIS dividend section against your broker statement and your CAMS or KFintech consolidated account statement before computing income.

Foreign dividends

Dividends from US stocks, ADRs, or foreign mutual funds are taxable at slab rates in India. Gross up the dividend by the foreign withholding tax (e.g., 25% US withholding); report the gross amount as income and claim the foreign tax withheld as a credit under Section 90 by filing Form 67 before the return due date. Many investors net out the foreign tax and under-report income — a position that does not survive scrutiny.

Capital Gains in 2026: The Complete Rate Card by Asset Class

Budget 2024 restructured capital gains comprehensively. Those provisions carry forward into FY 2026-27 as the operative framework.

Listed equity shares and equity mutual funds

The Rs. 1,25,000 exemption applies to the total of all long-term gains from listed equity and equity-oriented funds in the year — not per stock, not per fund. If your aggregate Section 112A LTCG is Rs. 1,25,000 or below, the tax on those gains is nil.

Pre-2018 grandfathering: For equity shares or equity mutual fund units purchased before 31 January 2018, the cost of acquisition for LTCG purposes is the higher of: (a) the actual purchase cost, or (b) the fair market value as on 31 January 2018. This grandfathering materially reduces taxable LTCG on long-held blue-chip positions.

Debt mutual funds: the post-April 2023 shift

Debt mutual funds — those investing not more than 35% of assets in domestic equity — that were purchased on or after 1 April 2023 are classified as "specified mutual funds" under Section 50AA. All gains from these units are:

• Taxed at slab rates as short-term capital gains
• Not eligible for the 12.5% LTCG rate, regardless of holding period
• Not eligible for indexation

This catches investors who bought a short-duration fund in FY 2024-25, held it for 15 months, and assume they qualify for LTCG treatment. They do not. Units purchased before 1 April 2023 retain their pre-amendment LTCG treatment (20% with indexation after a 36-month holding period) — but with Budget 2024's revision to indexation, even those older holdings need a fresh calculation.

Real estate LTCG: navigating the indexation revision

Immovable property qualifies as a long-term capital asset after a 24-month holding period. Budget 2024 introduced a date-sensitive choice:

• Property acquired before 23 July 2024: you may choose either (a) 20% with full cost-inflation-index (CII) based indexation, or (b) 12.5% without indexation — whichever results in lower tax. Compute both before choosing.
• Property acquired on or after 23 July 2024: taxed at 12.5% without indexation, with no choice available.

The practical implication: for property held 15–20 years, 20% with indexation usually produces a lower taxable gain because the indexed cost approaches or exceeds the sale price in inflationary markets. For property purchased in 2022 and sold in 2027, the CII benefit over five years is modest, and 12.5% may be cheaper. Run the numbers before filing Schedule CG.

Gold, SGBs, unlisted shares and other assets

Note: the Rs. 1,25,000 annual exemption applies only to Section 112A gains (listed equity and equity MFs). It does not apply to LTCG on gold, real estate, or unlisted shares.

Rental Income: Arriving at the Net Taxable Figure

Rental income is assessed under "Income from House Property" — not as business income, even if you own ten properties for investment. The computation follows a statutory formula:

1. Gross Annual Value (GAV): the higher of actual rent received/receivable or the expected rent, where expected rent is the higher of municipal valuation and fair rent, subject to standard rent.
2. Less: Municipal taxes paid during the year — deductible only if paid by the owner, not the tenant.
3. = Net Annual Value (NAV)
4. Less: 30% standard deduction on NAV — a flat deduction requiring no documentation of repairs, insurance, or maintenance.
5. Less: Interest on home loan — deductible under Section 24(b). For a let-out property, the full interest is deductible but set-off against other income heads is capped at Rs. 2,00,000 per year; excess is carried forward for eight years. For a self-occupied property, deduction is capped at Rs. 2,00,000 under the old regime and nil under the new regime.

Under the new tax regime, the interest deduction on a self-occupied property is unavailable. If you carry a large home loan, compute your tax liability under both regimes: the old regime's Rs. 2,00,000 deduction can easily outweigh the lower slab rates of the new regime for a taxpayer in the 30% bracket.

New Tax Regime vs Old Tax Regime: The Investment Income Lens

The new tax regime is the statutory default for AY 2027-28. Salaried individuals must actively opt out each year by filing Form 10-IEA at or before the return due date. Individuals with business or professional income who opted out once are generally locked in for that year and subsequent years unless they return to business income.

Capital gains and dividend tax rates are identical under both regimes. The regime choice turns entirely on the quantum of Old Regime deductions you can legitimately claim. If those deductions aggregate below roughly Rs. 3.75 lakh, the new regime's lower slabs typically produce less tax.

Worked Example: Mapping One Investor's FY 2026-27 Tax Bill

Profile: Amit Sharma, 45, salaried professional in Bengaluru. Defaulted to new tax regime. Salary: Rs. 15,00,000 (gross). Standard deduction: Rs. 75,000.

Step 1 — Classify by tax treatment:

• Special rate income (LTCG): Rs. 3,50,000
• Special rate income (STCG): Rs. 80,000
• Slab-rate investment income: Rs. 60,000 + Rs. 25,000 + Rs. 35,000 = Rs. 1,20,000

Step 2 — Compute LTCG tax:

• Gross LTCG: Rs. 3,50,000
• Less: Section 112A annual exemption: Rs. 1,25,000
• Taxable LTCG: Rs. 2,25,000
• Tax @ 12.5%: Rs. 28,125

Step 3 — Compute STCG tax:

• Rs. 80,000 × 20% = Rs. 16,000

Step 4 — Slab income tax:

• Net salary after standard deduction: Rs. 14,25,000
• Add slab-rate investment income: Rs. 1,20,000
• Total slab income: Rs. 15,45,000
• Tax on Rs. 15,45,000 (new regime): Nil on first Rs. 4 lakh + 5% on next Rs. 4 lakh (Rs. 20,000) + 10% on next Rs. 4 lakh (Rs. 40,000) + 15% on remaining Rs. 3.45 lakh (Rs. 51,750) = Rs. 1,11,750

Step 5 — Aggregate and apply cess:

• Slab tax: Rs. 1,11,750
• LTCG tax: Rs. 28,125
• STCG tax: Rs. 16,000
• Gross tax: Rs. 1,55,875
• Health and education cess @ 4%: Rs. 6,235
• Total tax liability: Rs. 1,62,110
• Less TDS already deducted (FD + MF dividend): Rs. 8,500
• Balance to settle via employer TDS and advance tax: Rs. 1,53,610

Key observation from the example: Amit's debt MF gain of Rs. 35,000 (units purchased May 2024, held 14 months) enters the slab computation as ordinary income — just like his salary. Had he purchased those same units before 1 April 2023 and held them 36 months, they would have qualified as LTCG. The post-April 2023 rule costs him his marginal-rate slab tax on the full Rs. 35,000 rather than 12.5% on it.

AIS Reconciliation Before Filing: A Six-Step Procedure

The Annual Information Statement (AIS) aggregates data reported by banks, companies, brokers, fund houses, and other financial intermediaries. Every mismatch between the AIS and your filed return is a candidate for a Section 143(1) adjustment notice. Do not treat reconciliation as optional.

1. Download the AIS and Taxpayer Information Summary (TIS) from the e-filing portal (login → AIS/TIS tab). The TIS shows the department's processed view of each income category. Start there to spot categories where there is already a discrepancy.
2. Reconcile interest line by line: List every FD, savings account, NSC holding, and corporate bond. Cross-check each AIS interest line with your bank statements and Form 16A TDS certificates. If the AIS shows a higher number than your records (common when banks report accrued interest), use the "Submit Feedback" option in the AIS portal to flag the discrepancy before filing — this creates a record and often pre-empts the notice.
3. Reconcile dividends: Do not rely on bank credits. Dividends from direct plans may be reinvested and never credit your bank. Use the consolidated statement from CAMS or KFintech for mutual fund dividends, and your broker statement for listed company dividends. Match each AIS line.
4. Reconcile capital gains: Download the capital gains report from your broker — Zerodha Tax P&L, Groww Capital Gains statement, ICICIdirect, or equivalent — and the mutual fund capital gains statement from CAMS/KFintech. Verify FY attribution: F&O positions squared off near 31 March sometimes land in the wrong year in both the AIS and the broker system. Fix at source before computing Schedule CG.
5. Check TCS credits under Section 206C(1G): If you remitted foreign currency under the Liberalised Remittance Scheme (LRS) and the remittance exceeded Rs. 7 lakh in the year, the authorised dealer (bank) would have collected TCS at the rate as notified. Verify this in Form 26AS (Part C) and include it as a credit in the return. This is one of the most frequently missed credits.
6. Tally advance tax and self-assessment tax challans: Every challan paid during the year (CIN number, bank BSR code, date, amount) must appear in 26AS. If a payment is missing from 26AS, the portal will not give you credit for it. Raise a correction with your bank immediately; do not file with unmatched challans.

Common Mistakes That Trigger Notices — and How to Fix Them

Mistake 1: Reporting NSC/KVP interest only at maturity

NSC interest accrues annually and is taxable in the year of accrual under the mercantile system, even though it is received only at maturity. Each year's accrued interest is also treated as a fresh investment eligible for Section 80C deduction under the old regime. Many investors skip annual reporting and declare everything in the maturity year, creating a mismatch with the AIS. Fix: compute the annual accrual from the post-office schedule and report it every year.

Mistake 2: Applying pre-2023 LTCG logic to post-April 2023 debt MF purchases

Investors who purchased short-duration funds in FY 2024-25, held them for 14–18 months, and enter LTCG in Schedule CG are filing incorrectly. Section 50AA captures all gains on these units as short-term, slab-rated income — no matter how long you held. Fix: filter your mutual fund holdings by purchase date; apply Section 50AA to every debt MF unit purchased from 1 April 2023 onwards.

Mistake 3: Forgetting the cost of a missed credit

If you omit Rs. 1,00,000 of interest income from the return and the department detects it in processing, the consequences compound quickly. Tax on Rs. 1,00,000 at 30% (highest slab) is Rs. 30,000. Penalty under Section 270A for under-reporting is 50% of incremental tax: Rs. 15,000. Interest under Section 234B at 1% per month accrues from April 2027. On Rs. 30,000 over, say, 8 months: Rs. 2,400. Total cost of missing Rs. 1,00,000 of interest: approximately Rs. 47,400 — nearly half the income itself.

Mistake 4: Failing to utilise the Rs. 1,25,000 LTCG exemption annually

The Section 112A exemption is annual and does not accumulate. If your LTCG is Rs. 90,000 this year, the unused Rs. 35,000 is lost. Investors who are below the exemption threshold should consider booking additional gains in listed equity or equity MFs before 31 March to utilise the full Rs. 1,25,000, then re-acquiring positions. This "gain harvesting" resets the cost base upward and permanently reduces future taxable gains.

Mistake 5: Missing advance tax obligations on mid-year capital gains

If total tax liability after TDS credits exceeds Rs. 10,000, advance tax must be paid by the quarterly deadlines: 15% by 15 June 2026, 45% by 15 September 2026, 75% by 15 December 2026, 100% by 15 March 2027. A large equity sale in August that was not anticipated means the September instalment must be revised sharply upward. Failure to pay the required percentage on time attracts Section 234C interest at 1% per month for the relevant quarter. Track realised gains after each quarter and revise advance tax proactively.

Set-off, Carry-Forward and End-of-Year Loss Harvesting

The Income-tax Act provides a structured hierarchy for setting off capital losses under Sections 70–74:

• Short-term capital loss (STCL) can be set off against both STCG and LTCG in the same year.
• Long-term capital loss (LTCL) can be set off only against LTCG in the same year; it cannot offset STCG, salary, or any other head.
• Unabsorbed losses can be carried forward for up to 8 Assessment Years, but only if the return for the year in which the loss arose was filed on or before the original due date (31 July 2027 for AY 2027-28, for non-audit cases). A belated return permanently forfeits the carry-forward right.

Practical loss harvesting before 31 March 2027: If you hold equity positions with unrealised losses, selling before year-end crystallises the loss. That STCL or LTCL can then be set off against gains already realised during the year, reducing your current-year tax. You can re-buy the same security after the sale; India does not have a statutory "wash sale" rule equivalent to the US. However, avoid round-trip transactions executed on the same day or in patterns that suggest the sale lacked commercial substance, as the department may invoke the general anti-avoidance provisions.

Carry-forward of LTCL from listed equity: Note that LTCL from listed equity (Section 112A assets) can be set off only against Section 112A LTCG, not against other categories of LTCG such as real estate or gold. Maintain asset-class-wise loss schedules in Schedule CG of ITR-2 to avoid incorrect carry-forward claims.

Foreign Investment Income, Schedule FA and LRS-TCS

Indian residents are taxable on their global income. Foreign investment income — whether from US stocks on Vested or INDmoney, international mutual funds, ESOPs from an overseas employer, or interest on an NRE account held before becoming a resident — must be reported.

• Foreign interest and dividends: taxable at slab rates. Include gross amounts before foreign withholding. Claim foreign tax paid via Form 67, which must be filed on or before the return due date. Filing Form 67 late forfeits the foreign tax credit for that year.
• Capital gains on foreign equity: typically taxed at slab rates as STCG if held under 24 months, or LTCG at 12.5% if held over 24 months (check the specific rules applicable to the asset and the country of listing). ESOPs: the perquisite value (FMV on exercise minus exercise price) is taxed as salary in the year of exercise; the subsequent gain on sale is capital gains.

Schedule FA in ITR-2 captures all foreign assets held at any point during FY 2026-27: foreign bank accounts, foreign equity and debt, foreign immovable property, beneficial interests in foreign trusts, and any foreign entity in which you hold a signing authority. Non-disclosure is not treated as a mere omission — it can attract penalties under the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015, which carries penalties up to 300% of the tax on undisclosed assets, plus risk of prosecution.

LRS-TCS: Outward remittances under the Liberalised Remittance Scheme above Rs. 7 lakh per financial year for investment purposes attract Tax Collected at Source (TCS) under Section 206C(1G) at the rate as notified by the Finance Act. Verify the TCS collected in Form 26AS (check Part C) and claim it as a credit in the return. Many investors forget this credit entirely and end up paying more tax than the law requires.

Key Takeaways

• Interest is always slab-rated: TDS is a credit, not a settlement. The new tax regime removes the 80TTA and 80TTB deductions — factor this into the regime choice before the first advance tax instalment.
• Dividends flow through the AIS company-by-company: a consolidated bank statement is not enough; reconcile the AIS dividend section against your broker and fund house statements before filing.
• Equity LTCG is 12.5% above Rs. 1,25,000; STCG is 20%: both rates apply identically under both tax regimes; do not assume switching regimes changes your capital gains burden.
• Debt MF units purchased from 1 April 2023 onwards carry no LTCG benefit: gains go into slab income at your marginal rate, regardless of how long you held.
• Real estate sellers with pre-July 2024 acquisitions have a choice: 20% with CII indexation or 12.5% without — compute both; the optimal answer changes with holding period.
• Carry-forward of capital losses requires timely filing: a belated ITR-2 (even by one day past 31 July 2027) permanently extinguishes the right to carry forward losses to future years — a cost no subsequent planning can recover.
• AIS reconciliation is not optional: submit feedback on disputed entries in the AIS portal before filing; a notice-free assessment begins with a clean reconciliation, not with a well-drafted reply to a scrutiny notice.