How to Calculate Taxes: Income tax & Investment tax Calculation

Tax deductions are an unavoidable part of our lives and sometimes due to the jargons and calculations they come with, we often don’t realize how much tax we might end up paying or if there’s any chance of saving any of that money.

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.

Income Tax and its Types

Here is a basic guideline on tax calculations for salaries, professional incomes, and other investment gains.

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, deductions under Sections 80C, 80D etc., cannot be claimed in the new regime. Let’s take an illustration¹:

Difference in deductions between old and new tax regime

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:

Tax liabilities for professionals with and without presumptive taxation

How to Calculate Income Tax?

Here are five essential steps you can follow to calculate income tax.

You start by calculating the annual gross salary you get, inclusive of HRA, LTA, special allowances etc. Begin by looking at the exemptions provided on the salary components. Next, you need to add the income you have received from other sources like FDs, rental income, capital gains etc. This will help you arrive at the gross salary.
The next step is to arrive at the net taxable income post removal of deductions. A standard deduction of Rs 50,000 can be availed by all, without making any investments or expenditures.
Next comes the investments and expenses eligible under Section 80, which includes the deduction of up to Rs 1.5 Lakh under Section 80C through investments like PPF, ELSS mutual funds, EPF, Sukanya Samriddhi Yojana, premium for insurance etc., Rs 50,000 under Section 80CCD(1B) through investment in NPS.
You can claim the deductions for the premiums paid towards the health insurance policy of your family and parents under Section 80D. If you have a home loan, you can claim deductions of up to a maximum of Rs 2 Lakh on the the interest paid under Section 24.
By subtracting all the eligible deductions from the gross taxable income, you get the total income which you need to pay tax on basis your tax slab.

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 investments serves as an inflation hedge by increasing the value of your investment over time. However, the gains and returns from these investments are taxed differently. Let’s compare taxes for different investment products:

Direct Equity and Equity Mutual Funds:

Short-term capital gains or STCG refers to gains from shares/equity mutual Funds held for less than 12 months before being sold. The profit on STCGs is taxed at 15% for domestic shares. In contrast, profits on shares/equity mutual funds that are held for over 12 months before selling are 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 three 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 three 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.

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.

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 (three 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 eight 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.

How to Calculate Capital Gains Tax

You can calculate the capital gains tax you need to pay for asset movement following the below-mentioned steps.

First things first, you need to determine the full amount you are to receive through the transfer of capital assets.
Look at the net value of consideration by deducting expenses related to transfer such as commission, brokerage, etc.
Calculate the cost of acquisition adjusting the indexation benefits wherever relevant
Look at the relevant exemptions applicable to you, especially under Sections 54/54B/54D/54EC/54F
Once you have these elements in place, use the following tax formula to calculate the LTCG chargeable to tax

LTCG chargeable to tax = Net sale consideration – (Indexed cost of acquisition of Indexed cost of improvements) – exemptions

Conclusion

An overview of how your money is getting taxed will help you get an idea on how to navigate taxes and save wherever you can. Afterall, no one likes a rude shock during tax season. Take your financial decisions and manage your money better exploring the avenues mentioned in the blog and make the most of it.

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