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Chapter 19 What Slab Does My Investment Fall In?

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.

  • In the case of short-term capital gains on debt funds, the total gains are added to the total income of the assessee and are taxed along with the other heads of income. Hence, the tax will be at the applicable tax slab.
  • In the case of short-term capital gains on equity funds, STCG is taxed at 15% plus the applicable cess. However, any short-term losses can only be written off against either long-term gains or short-term gains. They cannot be written off against other heads of income.
  • In the case of long-term gains on equity and debt, the tax treatment is distinct from the total income. There is a concessional rate of tax available at 20% with indexation in the case of debt funds and 10% without indexation (above Rs.1 lakh profit) in the case of equity funds.
  • Dividends are again slab-based. For example, as long as the dividend on equity is less than Rs10 lakh during the financial year, no tax will be applicable on the recipient of the dividends. However, if the total dividends earned by the individual from all equity and equity fund sources is more than Rs10 lakh, then there is an additional tax of 10% on the assesse.
  • In the case of investment income in the form of interest earned on bank deposits, bank FDs, corporate FDs, etc., such income will be treated as other income and will be added to the total income of the assessee and taxed at the peak rates applicable along with surcharge and cess as the case may be.

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
Individual
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
Interest income Rs.22,000
Winnings from lotteries/crossword Rs.14,000
Less Deductions (-)Rs.1,20,000
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
Surcharge -
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
Individual
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
Interest Income Rs.22,000 --
Winning from Lotteries/ Crossword Rs.14,000 --
Less Deductions -- (-)Rs.1,50,000
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 --
Surcharge Rs.1,89,805 --
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 Applicable Rs.35,62,500 Tax on Income
Tax on Dividends
Total Tax Payable
Rs.35,62,500
Rs.50,000
Rs.36,12,500
Surcharge Rs.5,34,375 Surcharge Rs.5,41,875
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.

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