So, you spent your weekend doing some serious financial planning to grow your wealth. But did you account for tax deductions from your estimated income calculations?
In this article, 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
Here is a basic guide on tax calculations for salaries, professional incomes, or other investment gains so that you can make well-thought financial decisions.
Income Tax
Incomes can be of two types: either you’re a salaried employee who makes a fixed amount each month, or you’re a professional like a doctor, lawyer, or freelancer whose income varies each month.
Income tax for salaried employees
It depends on what range your annual income falls into. There are 2 regimes that you can opt for, the old regime and the new regime. Let’s look at both below:
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. So, all the 80C, 80D and other deductions cannot be claimed in the new regime. Let’s take an illustration1:
So, your total tax payable would be:
- As per old regime: Rs. 3,25,000
- As per old regime: Rs. 3,37,500
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 will deduct TDS from your salary every month, meaning that 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 lakhs 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. But, if opting for this scheme, they cannot claim any other professional expenses as a deduction again.
For example, if you’re a doctor with an annual income of Rs 30 lakhs in financial year 2021-2022, and your business expenses amounted to Rs 3,00,000 in this year, here’s what your tax liability would look like:
Taxes on investments
You might have heard the saying “let your money work for you.” And that’s what smart investors do! Parking your money in diverse investments2 serves as an inflation hedge by increasing the value of your investment over time. But the gains and returns from these investments are also taxable! Let’s compare taxes for different investment products:
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 shares3. 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.
Debt Mutual Funds:
If you’ve invested in Debt Mutual Funds4, 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 (Click here to know about indexation).
For FDs, the interest earned in each fiscal year5 is taxed according to your income slab.
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, as shown below. We have written a detailed article about Taxation on Bonds here.
Do note that 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 is LTCG
- For unlisted bonds/MLDs, gains on investment sold before 36 months are considered as STCG and after 36 months is LTCG
Gold:
The shiny metal is taxed at 20%6 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. SGB investments, however, if held till the maturity period of 8 years, are tax-free.
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: Information represented is as of November 2022 and is provided for educative reasons. Please consult your tax advisor for queries tied to your unique situation.
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