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Does your income slab make a difference to the way your investments are taxed? The answer is yes. The reason is that, in most cases, the income on your investments is added to your total income so that it can be taxed at the applicable rates. For example, in the case of short-term gains on debt funds, the same is added to your total income before being taxed at the effective rate of 10%, 20%, or 30%, based on the tax slab you fall into.
Let us look at some key cases where your effective tax slab makes an impact on your investment income treatment.
How does the income slab figure into your investment income?
There are a few key points you need to understand about the tax slabs into which your investment income will actually fall.
Case 1: When There is Short-Term Gain From Section 111(A) and Otherwise
Let us consider an instance, wherein assessee Rajesh Mehta earns income from salary. He also has a self-occupied house property on which he pays Rs1.65 lakh/year as interest on the home loan. The person does not have any long-term gains during the year. However, he has short-term capital gains (STCG) from equities and also from non-equity sources that are not covered under Section 111(A) of the Income Tax Act. Apart from these incomes, Rajesh also earns some income from interest on his bank deposits as well as some casual income from a lottery scheme. Let us now see how his income slabs will be determined in this case and how they will impact his investment income.
|Taxpayer||Income Tax Calculation (FY2018-19)||Sub-Amount||Final Amount|
|Income from salary||Rs.21,00,000|
|Add||Income from House Property||Rs.1,65,000|
|Add||Short-term capital gains||Rs.1,80,000|
|Short-term gains (other than Section 111(A))||Rs.1,35,000|
|Short-term gains under Section 111(A)||Rs.45,000|
|Add||Long-term capital gains||-|
|Long-term capital gains @20%||-|
|Long-term capital gains @10%|
|Add||Income from other sources||Rs.36,000|
|Winnings from lotteries/crossword||Rs.14,000|
|Net taxable income||Rs.20,31,000|
|Income tax summary|
|Income taxable at normal rates||Rs.19,72,000||Rs.4,04,100|
|STCG under Section 111(A) @15%||Rs.45,000||Rs.6,750|
|LTCG at the rate of 20%||-|
|LTCG at the rate of 10%||-|
|Winnings from lottery puzzles @30%||Rs.14,000||Rs.4,200|
|Income tax payable||Rs.4,15,050|
|Education and Health Cess||Rs.16,602|
|Total tax liability||Rs.4,31,652|
In the above instance, the short-term gain from non-Section 111(A) sources are just added to the total income. However, profits under Section 111(A) (short-term capital gains from equity and equity funds) are taxed at a concessional rate of just 15%, and hence, they are shown separately as a part of the tax summary.
Another thing to note here is how the income from lotteries and puzzles are taxed. There is no penal rate of tax on this head of income, but the rate of tax is a flat 30% even if you are in the 10% or the 20% tax bracket. Being speculative income, this is the case. For example, if you trade intraday, it will be taxed at a flat rate of 30% irrespective of the tax bracket that you operate in. In the next section, we shall look at how the slabs come into play when long-term capital gains are also considered.
Case 2 – Where There is Also Long-Term Gain @20% and @10%
Let us consider an instance wherein the assesse Paresh Shah’s primary income is his salary from the MNC he is employed with. He also has a self-occupied house property where he is paying an interest cost of Rs.2.25 lakh each year as interest on the home loan taken to finance the home. Paresh has LTCG on equities to the tune of Rs.2,80,000 and LTCG on sale of property at Rs.35,00,000. In addition, he also has some short-term gains. He has STCG from equities and also from non-equity sources that are not covered under Section 111(A) of the Income Tax Act. Apart from these sources of income, Paresh also earns income from interest on his bank deposits as well as from a recent raffle jackpot contest. Let us now see how his income slabs will be determined in this case and how they will impact his investment income.
|Taxpayer||Income Tax Calculation (FY 2018-19)||Sub Amount||Final Amount|
|Income From Salary||--||Rs.47,00,000|
|Add||Income from House Property||--||(-)Rs.2,00,000|
|Add||Short-term Capital Gains||--||Rs.2,10,000|
|Short-term gains (other than Section 111(A))||Rs.1,35,000||--|
|Short-term gains Under Section 111(A) @15%||Rs.75,000||--|
|Add||Long-term Capital Gains||--||Rs.36,80,000|
|Long-term Capital Gains @20%||Rs.35,00,000||--|
|Long-term Capital Gains @10%||Rs.1,80,000||--|
|Add||Income from Other Sources||--||Rs.36,000|
|Winning from Lotteries/ Crossword||Rs.14,000||--|
|NET TAXABLE INCOME||--||Rs.82,76,000|
|Income Tax Summary|
|Income Taxable at normal rates||Rs.45,07,000||Rs.11,64,600|
|STCG under Section 111(A) @15%||Rs.75,000||Rs.11,250|
|LTCG at the rate of 20%||Rs.35,00,000||Rs.7,00,000|
|LTCG at the rate of 10%||Rs.1,80,000||Rs.18,000|
|Winnings from Lottery Puzzles @30%||Rs.14,000||Rs.4,200|
|Income Tax Payable||Rs.18,98,050||--|
|Education and Health Cess||Rs.83,514||--|
|Total Tax Liability||Rs.21,71,369||--|
Paresh Shah’s case presents a slightly different picture compared to the previous case of Rajesh Mehta. During the financial year, Paresh also has an indexed gain of Rs.35 lakh arising from the sale of property, tax on which is applicable at 20%. In addition, he also has some gains from equities to the tune of Rs.2.80 lakh. In this case of equities, there is a blanket exemption of Rs.1 lakh and the balance of Rs.1.80 lakh is taxable at the flat rate of 10%. In this case, the interest income and the STCG from sources other than Section 111(A) are included with the total taxable income. Items other than the normal income rates applicable are also included and taxed at their respective rates. There is one more thing different in this case and that is the surcharge applicable on the tax.
Surcharge is currently chargeable at 10% of the taxable amount if the taxable income is above Rs50 lakh and at 15% of the taxable amount if the taxable income is above Rs1cr. In the case of Paresh Shah, the total income after adding the long-term capital gain on the sale of his property goes well above Rs.50 lakh, and hence, an additional surcharge at the rate of 10% is leviable in this case. As a result, the effective rate of tax of short-term gains and long-term gains also goes up to the extent of the surcharge and the cess summed up.
Case 3 – Where Equity Dividends for the Year Exceed Rs.10 Lakh
There is one type of slab-based investing that has to be understood. When a shareholder holds equities and earns dividends on these shares that are more than Rs.10 lakh, then the shareholder is required to pay tax at 10% on the amount above the Rs.10 lakh-cap. This rule is only applicable in case of direct equity investments and not in case of equity funds. Such tax will also entail surcharge and cess. While surcharge will only be conditional above the income threshold, the cess will be applicable across-the-board. What does that mean?
Let us assume that a shareholder who received Rs.15 lakh during the year as equity dividends has a total income of Rs.1.25cr. What will be the effective tax the shareholder is liable to pay on the dividends received?
Let us take the above example and see how the taxation will work with and without the dividend income.
|Without Dividend||Amount||With Dividend||Amount|
|Total Income||Rs.1,25,00,000||Total Income||Rs.1,30,00,000|
Tax on Income
Tax on Dividends
Total Tax Payable
|Health & Education cess||Rs.1,63,875||Health & Education cess||Rs.1,66,775|
|Total Tax Payable||Rs.42,60,750||Total Tax Payable||Rs.43,20,550|
In the above case, the shareholder has received Rs15 lakh as dividends. There is an exemption of Rs10 lakh and only the balance of Rs5 lakh will be subject to tax at 10%. The higher tax paid due to adding this dividend income as above is Rs.59,800. Now you may wonder that why did your 10% tax on Rs.5 lakh become Rs.59,800 instead of Rs.50,000. This additional Rs.9,800 that you are paying is due to the combined impact of the 15% surcharge and the cess at 4%. Effectively, the 10% tax on dividends becomes an effective rate of 11.96% tax when the impact of surcharge and cess is considered. That is what explains this increase in your tax liability on the dividends due to the impact of clubbing with total income.