Can people tell whether I've read their SMSes? I'm using Google Hangouts on Nexus-5 with 4.4-KitKat. I wonder if people can tell when I read their SMSes? Does my setup do automatic receipt notification without asking me?
No, there is no way to know whether a SMS is read or not. As of now it is only possible to know whether a SMS is successfully delivered to the phone or not.

This delivery report is not a phone specific or app specific feature but it is provided by the operator, which is usually free.  However the app should sport a feature to enable delivery notification and the SMS that are already sent with this setting off do not get the effect.

Also, you a recipient do not have any means to avoid sending the delivery notification as it is not controlled by any of the phone or app's settings.