One of the most dreaded times of the year is here: Tax-paying season.
Not only do we have to part with our hard-earned money, but the process to do so is super complicated. Wondering why?
You have to pay taxes not only on your salary, or your business income but on any and every gain that you make.Â
Won a lottery? Pay taxes.
A distant relative gifted you a massive fortune? Pay taxes.Â
Even the gains that you've made from your crypto and stock investments will be subject to taxes.Â
And all this is the easy part. The taxes on these gains depend on a lot of factors. And you are in charge of computing it correctly. Otherwise, you will be considered 'non-compliant' with the law.Â
Hold on. We gotta pay taxes on crypto and stock gains too?Â
Yes. Add mutual funds to the list too. But don't you worry we are here to give you a basic idea of how to go about it. And if you are one of those unfortunate souls who has made losses this year, don't lose heart, we have something for you too.
But first, let's clarify what kind of taxes you need to pay on which investments.
And another major factor that will determine how much tax you pay is the duration for which you hold on to your investments.
Stocks and Bonds
If you sell listed shares within 12 months of buying them, then you have to pay short term capital gain taxes. This amounts to 15% of your gain, no matter what tax slab you fall under.
But if you sell shares after 12 months, then you're only taxed if your gains exceed Rs. 1 lakh ( the same applies for bonds and mutual funds). If they do, then you'll have to pay 10% of your gains.Â
Different rules apply on the sales of listed, unlisted shares, bonds and mutual funds.Â
Here's a handy chart to help you understand how your different investments will be taxed.
Wondering what indexation means? Well, it's a great way to help you save taxes.Â
Let's explain using an example.
Suppose you bought a share worth Rs. 100 in January 2019. In January 2021, the share is worth Rs. 200, so you sell it off. Your net gain is Rs. 100. But since you held the investment for two years, you don't need to pay taxes on the entire Rs. 100. Umm, why?
In 2019, you probably could have bought more stuff with this Rs. 100 but it's worth much less now. Thus the government gives you some concession to nullify the impact of inflation. (Refer here to understand how).
Okay, ReadOn enough about gains. What if I've suffered a loss?
You know how they say, "Apna Time Aayega". One day you will also turn profitable and you will be able to save taxes with your losses of today.Â
All you have to do is report the loss in a timely manner. And you have 8 years to offset it against profits. (Although there are some riders here too. For instance, a long term capital loss can only be set off against long term capital gain).
Mutual Funds
We've already talked about equity and debt mutual funds, but what about hybrid funds? A lot of mutual funds feature a combination of debt and equity funds. So, how are they taxed?
Simple. If the fund's equity exposure is more than 65%, then the fund is an equity fund, otherwise, it is a debt fund. And the taxes will be calculated based on this exposure.
And if you are investing money through SIPs, you will have to pay short-term capital gains tax on the interest you receive.
Now, there is one thing you need to keep in mind when investing in mutual funds.Â
A lot of times we invest in regular mutual funds, which you've purchased from a broker or some other middleman. The middleman charges you a commission
After a year of investing in these regular funds, you may decide that you no longer want to pay this commission. So, you shift your regular plan funds into a direct mutual fund (directly purchased from the company with no middleman in between).Â
Voila, you think you've saved yourself a lot of money. And you may have. But now you need to pay taxes. Because when you shift your funds, you are technically selling off the old ones and buying new ones afresh. So, you need to pay taxes based on how long you held the original funds. This is something you need to keep in mind when filing your taxes.
P.S: Any dividends you get from stocks or mutual funds are taxable. They will be taxed at the same rate as your regular income.
The Crypto Question
Okay, we've covered some of the most popular investments but that list is now incomplete without including cryptocurrencies. Millions of Indians have invested in crypto and now they're all wondering how they will be taxed.Â
Well, cryptocurrencies will also incur capital gains taxes. If you've made any profit from a crypto within 36 months of owning it, the profits will be counted as additional income and you need to pay taxes according to your tax bracket.
But if you make a profit after 36 months, you'll need to pay 20% tax plus cess after indexation.
However, if you’ve been trading crypto very frequently, you could claim the gains as business returns and pay business tax.
Okay, ReadOn. We've understood what kind of taxes are involved, but there's still a lot of calculation and computation that we need to do.
Well, if you use a stock trading app like Zerodha for investing, then you can easily get statements highlighting how much profit or loss you incurred while investing. This makes your task much simpler.Â
Plus, the Income Tax Department has also launched a new initiative, the Annual Information System, which gives you a detailed history of all your financial transactions.Â
You can compare the two statements to make sure everything is in order and you're ready to file your taxes.
We hope this helped you clear your basic tax-related doubts. If the process still overwhelms you, you can always connect with a tax professional who will sort things out for you in no time. And if there's anything else that's stopping you from paying your taxes, let us know in the comments and we'll try our best to help you out.
P.S. A cess and surcharge are applicable on all the taxes mentioned above.
Share this with your friends via WhatsApp or Twitter and help them declutter news from noise! See you tomorrow :)
You can also listen to our stories because the Revolution ReadOn podcast is live!! Here: you can catch it on Spotify, Apple Podcast or Amazon Music, Google Podcasts, Gaana and Jio Saavn.
If you are coming here for the very first time: Don’t forget to join us on WhatsApp to get daily updates! 👇