Introduction
Non-qualified investments are financial products or assets not qualify for tax deductions or exemptions under the Income Tax Act, 1961. This excludes Public Provident Fund (PPF) and equity-linked savings schemes (ELSS) under Section 80C, since they are tax-saving (qualifying) investments. Non-qualified investments are made from after-tax income, and the earnings on these assets, be it interest, dividends, or capital gains, are taxed at their respective rates, with no deferral or special rebate. This contrasts with qualified/tax-saving options, where some tax shield is provided. In fact, you will need to calculate and plan around your tax obligations with non-qualified investments, as there is no tax shield.
Why Non-Qualified Investments?
While there are no tax benefits for putting your money into non-qualified investments, there is some flexibility. If you choose to do non-qualified investments, you will not have limits on how much you can contribute. For example, you can invest an unlimited amount in stocks, bonds, or even gold (subject to regulations) rather than in an investment such as PPF, ELSS, etc, which has a limit of ₹1.5 lakh per annum under section 80C. Also, suppose you were investing in your favourite blue-chip stocks using a non-qualified investment account, or even your favourite collectables that have grown in value. In that case, the whole strategy may further support your high-growth or high-liquidity objectives.
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Examples of Non-Qualifying Investments
Collectables and Precious Metals
Non-qualifying investments include tangible assets like art, antiques, jewellery, and other tangible assets such as precious metals (gold or silver). For example, buying antique furniture or gold ornaments outside sovereign gold bonds will be classified as non-qualifying assets. The value accretion will ultimately be taxed as capital gains. You can deduct the acquisition and other improvement costs, but you will not get any special exemptions (as you would with certain notified tax-exempt bonds). These assets appeal to you if you believe in physical investing but require detailed tax planning.
Traditional Financial Instruments
Stocks, bonds, and real estate investment trusts (REITs) bought through a regular demat account, not under tax-saving schemes, are also non-qualifying investments. For example, dividends from stocks in a non-qualified investment account or interest from corporate bonds will be taxed as other sources of income at your slab rate, and tax liability in your returns will be correctly accounted for since there are no exemptions as in tax-free bonds.
How Are Returns Taxed?
The profits from non-qualifying investments are taxed in the year they are earned or realised. For example, the dividend received from stocks in a non-qualified investment account above ₹5,000 per year is taxed at your slab rate. TDS is usually deducted as applicable. The interest and other liquidations from fixed deposits (non-tax-saving fixed deposits) will be included in your entire income and thus taxed at your slab rate.
Suppose you realise capital gains on assets such as artwork, jewellery, etc. Then, the prescribed rules need to be reviewed carefully. If you hold the asset for less than three years (short term), the gains will be realised at slab rates. If the abovementioned assets are sold within 36 months, any gains can be taxed at your slab rate (STCG). However, if you hold the assets longer, the gains are taxed at 20% with indexation (LTCG). The LTCG rate of 12.5% (after indexation) only applies to listed equity shares and equity-oriented mutual funds.
Additional Considerations for NRIs
Are you an NRI? With respect to rules, there can be more complications because selling a non-qualifying investment can lead to TDS deductions, and it also becomes essential to assert your position under DTAAs (Double Taxation Avoidance Agreements) to avoid double taxation. In this case, working with professionals who can help you comply with rules and optimise your investment return would be in your best interest.
Conclusion
You must be careful to maximise your non-qualifying investments. You must pay attention to all the holdings. Non-qualifying investments may have more liquidity and flexibility than tax-saving schemes, but do not have tax shielding. You can choose our advisory services that assist if you would like help navigating the tax landscape in India to support a portfolio aligned with your objectives and trails for compliance.