From Bonds To Crypto: Taxation Rules For Alternative Investment Options
How Much Tax You Pay When Investing In Alternatives!
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The article provides a comprehensive overview of taxation rules for various alternative investment options in India, including bonds, crypto, digital gold, and fractional real estate.
It details the tax implications for different investment products, be it their interest income, TDS or capital gains.
The article explains how returns from invoice discounting and asset leasing are taxed, highlighting the differences between direct leasing and LLP-based platforms as well.
It covers the taxation of P2P lending, litigation financing, and agriculture financing platforms.
The article also touches upon fractional real estate’s taxation.
Day in and out, we at ALT Investor, which is India’s first and largest community for alternative investments, keep getting enquiries from our members regarding the taxation rules for various alternative investment options.
So today, in this blog of ours, we bring to you the list of various alternative investment options in India and the respective taxation rules associated with their offerings, be it corporate bonds, crypto, digital gold, fractional real estate, etc.
Taxation Rules For Alternative Investment Options
Corporate Bonds
10% TDS on interest earned, after which it gets added to your ‘income from other sources’ and taxed as per your slab.
Capital gains taxation is as follows:
Listed Bonds:
Holding period of ≤ 12 months: Short-Term Capital Gains (STCG): As per income tax slab rate
Holding period of > 12 months: Long-Term Capital Gains (LTCG): 12.5% without indexation
Unlisted Bonds:
With effect from 23rd July 2024, all the capital gains are treated as STCG, regardless of the holding period, as per Section 50AA of the Income Tax Act. They are taxed as per your income tax slab rate.
SDIs (Securitized Debt Instruments)
TDS on interest earned on SDIs was reduced from 25% to 10% w.e.f. 1st April 2025. The interest income is taxed as per your tax slab rate.
As far as capital gains are concerned, they are dependent on whether they are listed or unlisted:
Listed SDIs:
Holding period of ≤ 12 months: Short-Term Capital Gains (STCG): As per income tax slab rate
Holding period of > 12 months: Long-Term Capital Gains (LTCG): 12.5% without indexation
Unlisted SDIs:
With effect from 23rd July 2024, all the capital gains are treated as STCG, regardless of the holding period, as per Section 50AA of the Income Tax Act. They are taxed as per your income tax slab rate.
SGBs (Sovereign Gold Bonds)
The interest earned gets taxed as per your tax slab rate after getting added under ‘income from other sources’. No TDS on interest earned, and no tax is levied on the maturity amount of SGBs.
54EC Bonds
No TDS is deducted on your interest earned, but it gets taxed as per your tax slab rate. As far as capital gains are concerned, 54EC bonds can only be sold or transferred after a lock in period of 5 years. And at maturity, they are redeemed at their face value, so there are no capital gains on redemption, only the interest component gets taxed during the tenure.
Invoice Discounting
Invoice Discounting returns earned are added to your total income and then taxed as per your slab rate.
Asset Leasing
Direct Leasing Platforms- Income from Direct Asset Leasing is seen as "Profits and Gains from Business or Profession (PGBP)" and can be computed in 2 different ways:
-Normal Tax Provisions (Section 28 to 44AB): You can keep the asset on your books and depreciate it, claim any charges you incurred in maintenance, insurance, etc. and calculate
your final income where tax will be paid as per your slab.
-Presumptive Income Provisions (Section 44AD): You calculate your income as 6% of the total lease rentals you have received and calculate tax on that as per your slabs.
LLP Model Platforms-The LLP will directly own the assets as long as the leasing agreement is in force and will calculate its Net Income after accounting for all depreciation, and expenses related to the asset.
LLPs cannot calculate tax on a presumptive basis as per Section 44AD (mentioned in Direct Leasing above). All Net Income by LLP will be taxed at a flat rate of 30% and post-tax returns
will be distributed to the partners per their share.
P2P Lending
Interest earned from P2P lending is taxed as ‘Income from Other Sources’ and added to your total income. It gets taxed at applicable income tax slab rates. There is no TDS.
Fractional Real Estate (FRE)
Capital gains from property appreciation: The appreciation from selling the property will be termed capital gains. Since most of our properties are held for 2 years or more, the resulting capital gains will be considered long-term, currently taxed at 20%. However, this rate can be further reduced by applying indexation benefits.
Rental Yield: The taxation of rental yields will depend on the type of SPV:
- SPVs structured as Private Limited Companies: The rental yields received, categorized as 'Income from other sources,' will be taxed in the hands of individual investors according to their respective tax slab rates.
- SPVs structured as LLPs: The rental yields received will be taxed at 30%.
Also, TDS will be applicable for investments where the SPV is structured as a Private Limited Company. Currently, the TDS for Indian residents will be 10%, and for NRIs it will be 20% or as per applicable rates in Double Taxation Avoidance Agreement (DTAA), subject to the availability of valid Tax Residency Certificate (TRC) and income tax provisions.
REITs
Capital gains tax: STCG (≤12 months): 20%, LTCG (>12 months): 12.5% on gains above ₹1.25 lakh.
Interest and rental income are taxed at slab rates, and dividend taxation depends on SPV's tax regime choice. Also, a 10% TDS on interest/rental income is levied if it exceeds ₹10,000.
InvITs
Interest Income taxed as per your applicable slab rate. 10% TDS applies if total interest distributions exceed ₹10,000 in a financial year. Dividend Income (if the underlying SPV has not opted for concessional corporate tax under Section 115BAA), then dividends received by you are exempt; otherwise they are taxable at your slab rate. Also, 10% TDS applies on dividends above ₹10,000 per year
As far as capital gains are concerned, STCG (Holding ≤ 36 months) taxed as per your slab rate, while LTCG (Holding > 36 months) is taxed at 10% without indexation. Also, rental Income is taxed as per your slab rate with 10% TDS beyond ₹10,000 per year.
Unlisted Shares
Capital Gains Taxation:
Short-Term Capital Gains (STCG): Shares held for ≤ 24 months: Taxed at income tax slab rate.
Long-Term Capital Gains (LTCG): Shares held for > 24 months: Taxed at 12.5% without indexation.
Dividend Income:
Dividends from unlisted shares are taxed as ‘Income from Other Sources’ at applicable slab rates. TDS is deducted at 10% if dividend income exceeds ₹10,000 annually.
Digital Gold
If digital gold is sold within 2 years of purchase, short term capital gains are taxed as per investor’s income tax slab rate. If the gold is sold after 24 months, gains are taxed at 12.5%, with no indexation benefit.
Cryptocurrency
Capital gains from cryptocurrency are taxed at 30%. Additionally, 1% TDS is applicable on all sell transactions exceeding Rs 50,000 in a financial year. Also, loss from digital assets is not allowed to be set-off against any other income.
Conclusion
We all can agree that understanding the taxation rules for alternative investment options is crucial for investors looking to diversify their portfolios in India, right? Each investment option, whether it be bonds, crypto, digital gold, fractional real estate, or others, comes with its own set of tax implications.
So, by being informed about these rules, investors can make more strategic decisions, optimize their returns, and ensure compliance with tax regulations. As the landscape of alternative investments continues to evolve in India, it’s pretty obvious that staying updated on the latest tax rules becomes essential for maximizing investment potential and achieving your financial goals, right!
Please note that this is an opinion blog and not official research advice. This blog aims to promote informed decision-making and neither encourages nor discourages you from investing in any asset class.
We plan to come up with more blogs discussing different types of instruments available in the world of startup investing, write on due diligence for some platforms, and also existing and upcoming alt investment deals in the Indian market. If you want to dig deeper into the world of alternative investments and reach out to various founders, leaders and investors in this industry, join our free community by clicking here!
