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Making tax calculations less taxing

You have spent your weekend doing some serious financial planning to grow your wealth. However, did you account for tax deductions from your estimated income calculations? We give you a high-level 101 on calculating tax for different types of investments so you can make your financial planning tax efficient.

Calculating taxes

Understanding tax calculations is important to make well-thought financial decisions.

Income Tax

Incomes can be of two types: either you’re a salaried employee making a fixed amount each month, or a professional whose income varies each month. The income tax for salaried employees depends on what range your annual income falls into. There are 2 regimes that you can opt for: old and new.

While the tax slabs seem lower in the new regime, the difference between both is that you cannot claim any tax deductions in the new regime. Thus, all the 80C, 80D and other deductions cannot be claimed in the new regime. You can opt for any tax regime that you wish, depending on the deductions that you would like to claim.
For salaried individuals, usually, the employer deducts TDS from the salary every month. This means that the tax is deducted at the source.

Presumptive taxation for professionals

Professional tax amounts vary from state to state. Still, taxable amounts largely fall into the same brackets as those used for salaried employees and are calculated based on annual income slabs.

A professional with a net annual revenue under Rs 50 lakh can opt for a presumptive taxation scheme where they can pay tax on 50% of the gross revenue as per the tax bracket it falls into. However, if they are opting for this scheme, they cannot claim any other professional expenses as a deduction again.

Taxes on investments

There is an adage that goes “let your money work for you.” And that’s what smart investors do! Parking your money in diverse investments serves as an inflation hedge by increasing the value
of your investment over time. However, the gains and returns from these investments are also taxable! Let’s compare taxes for different investment products:

a) Direct equity and equity Mutual Funds: Short-term capital gains or STCG refers to shares/equity mutual funds held for less than 12 months before being sold. The profit on STCGs is taxed 15% for domestic shares. In contrast, profits on shares/equity Mutual Funds that are held for over 12 months before selling will be classified as long-term capital gains, and the profit here is liable to a 10% income tax rate, which is calculated after an exemption of INR 1 lakh in a financial year. Essentially, here, you get a greater tax benefit if you invest in equity that you hold for over a year.

b) Debt mutual funds: If you’ve invested in debt mutual funds, profits on a unit held for less than 3 years are considered short-term capital gains and are added to your taxable income. This means they attract tax as per the Income Tax slab you fall in. In contrast, long-term capital gains, or profit from a debt fund held over 3 years is taxable at 20% with the benefit of indexation.

For FDs, the interest earned in each fiscal year is taxed according to your income slab.

c) Bonds, debentures, MLDs: Depending on whether the bond is a taxable bond, tax-free bond, tax-saving bond or a zero-coupon bond, the taxation is done differently.

The capital gains are classified according to the holding period for different kinds of bonds and MLDs:
● For listed bonds/MLDs, gains on investment sold before 12 months are considered as STCG and after 12 months LTCG
● For unlisted bonds/MLDs, gains on investment sold before 36 months are considered as STCG and after 36 months LTCG

d) Gold: The shiny metal is taxed at 20% for long term gains (3 years+) and based on income tax slab rates for short term gains. This taxation is applicable for all forms including physical, digital, or SGB if you liquify it before maturity. The SGB investments, however, if held till the maturity period of 8 years, are tax-free.

e) Alternative assets: Returns of alternative investment products such as Invoice Discounting, Lease Financing and P2P Lending are considered as “income from other sources” in the investor’s ITR. The returns are thus taxed as per the investor’s income tax slab, as part of their total taxable income.

As an investor, you should always know how much tax you would need to pay on profits from different investments before making financial decisions. This will help you to secure your financial future based on intelligent money moves.



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Disclaimer

Views expressed above are the author’s own.



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