For Indians older than 22, ‘tax’ is often thrown around as an ambiguous term for which there is no clear calculation. In fact, a lot of us have believed that the company we work for, deducts tax from our salaries as per government regulations. But how true is that? We aim to paint a realistic picture of your tax breakdown and how much of your ‘take home’ is actually ‘take home’. We will also list the tax benefits of investing and trading.
The Indian government classifies the country’s working population into different tax slabs. And based on the category you belong to, you will have to file your returns and pay your taxes.
For resident individuals below 60 years during the financial year
For this article, let us assume that you belong to the 30% tax rate; that is, you earn more than Rs. 10,00,000 per annum.
Now, 30% of your income accounts only for the direct tax you pay. There are several ways in which you have to pay indirect tax for everything else you spend money on. This could be a movie date with your significant other, a night out drinking with friends or even a shopping spree for your kids.
On a Rs.1000 restaurant bill, you pay 18% of that amount as GST. But the Rs. 1000 bill is calculated based on the cost price of the ingredients, which the restaurant would have bought after paying a tax on its price. This means that you effectively pay around 25% tax for a single meal.
Movie tickets are billed with a 28% GST. Similarly, everything you purchase comes with an indirect tax built in with it. Considering all your expenses like medical, vehicle maintenance, fuel, and everything else, the total indirect tax you pay can amount to 20-23% of your salary.
When combined, the direct and indirect taxes can amount to a whopping 40-43% of your salary.
So, how can you pay less in tax?
The first step would be to take a good look at your salary slip and any loans you have taken. The government is obligated to give you tax exemptions which you can claim, to reduce your direct tax by up to 7%.
Then, you can consider investing in mutual funds or starting a Systematic Investment Planning (SIP), in which you can invest a part of your income on a monthly basis. Under Section 80C of the Income Tax Act, Rs. 1,50,000 can be claimed in the form of tax deduction for mutual funds investments.
Brokerage firms like Zebu, allows you to invest in direct mutual funds, which in turn increases your returns significantly.
You can also choose to invest in promising companies and wait for a few years for your returns to grow. The profit you make from this is called long-term capital gain. And in India, this is taxed at only 10%. As companies grow, they offer dividends and bonus to their retail shareholders. And dividends are not taxed, which is an additional benefit of staying invested. Even for short-term traders, the returns from equity trading are taxed only at 15% per annum. Please note that even if you belong to the 5% tax slab, your returns from share trading will be taxed at 15%.
Although it might seem like you are paying too much in tax, there are several ways to reduce it. The important step is to stay financially aware of laws, budgets, and provisions which will help you. Effectively utilising the above-mentioned steps can significantly bring down the tax you have to pay by up to 20%.