Hello Readers! 

People as they rise up in their professional life, they can clearly observe that the taxes catch up their income much faster than they think. As per a survey, it has been analyzed that many people end up paying taxes between 35%-42% of their income per annum.

If you are an earner that you are liable to pay tax, this is your basic duty, which is necessary and cannot be escaped. But it does have one advantage, calculating your taxes to be paid, leads you to search about the investment that can help you save tax. Also, it leads you to explore tax-saving instruments that give you the benefit of wealth creation along with tax efficiency.

CAPITAL GAINS ARE MORE TAX EFFICIENT THAN INTEREST INCOME

Those investors who fall under higher tax bracket, are advised to focus more on investments that offer capital gains and not instruments that offer interest income. This is because the interest income is taxed at the marginal rate of tax or applicable income tax rate as per the individual. However, in capital gains, the tax rate is fixed.

Capital gain can be referred to as the change in the principal value of one’s investment that is a change in price.

Capital gain can be long and short, as per the fund you have invested and for the period you have invested. If you hold the asset for at least 3 years if it is a bond or even a property investment, then it is referred to as long-term capital gains. Short term capital gains are applied if the holding period is less than three years.

In case of equity mutual fund, long term capital gains are at 10% and short term at 15% while for bonds and other fixed-income investments like debt funds, long term capital gains tax is at 20% with indexation, while short term capital gains tax is at the income tax rate.

PLANNING INCOME IN THE FORM OF DIVIDEND HAS NO ADVANTAGE

Before the announcement of the union budget for 2020, the dividend received by the investors in their hand was taken as tax-free, but now dividend received by an individual investor is taxable at the income tax rate applicable to the individual.

Thus, this can be another reason to stick to capital gains, instead of interest income, when it comes to measuring the tax efficiency. It also works well for your capital appreciation if you choose the growth option instead of a dividend option.

YOU MIGHT NEED NOT TO INVEST IN TAX SAVING INVESTMENTS

Well, as per the Income Tax Act, Section 80C, if you invest an amount of Rs 1,50,000 per annum in tax saving investment like ELSS (Equity Linked Saving Scheme) mutual funds, PPF (Public Provident Fund) or other, it helps you save tax. Your EPF (Employee’s Provident Fund) contribution is included in this.

If you fall under a higher tax bracket, that means you are been paid a good amount of salary. Here you need to check your EPF contribution. In case you are eligible for a higher mandatory contribution to EPF, the entire amount eligible under Section 80 C will get covered by EPF.

For example, if a person has a basic salary 13 lakh a year, then he must be contributing Rs 1.56 lakh as mandatory EPF at 12% per year. This means you need not to have any other tax saving in your portfolio, you are already fulfilling the criteria to save tax by your EPF contribution.

Here, the above-mentioned points are must to know for every individual, especially for those who fall under the highest tax bracket. This will help you plan your taxes efficiently and make the most efficient investment choices.

For any kind of query, you can contact us at Shri Ashutosh Securities Pvt Ltd., we are here to help you in any way possible.

Happy Investing!

(Mutual Fund investments are subject to market risk Illustrations are for example only, there is no guarantee of returns. Past performance is not an indicator/guarantee to future returns).