Understanding the Impact of Taxes on Investments

Introduction

Ramesh, a shop owner in Mumbai, invested ₹1,00,000 in shares. He sold them for ₹1,20,000 in a year, earning ₹20,000 profit. But after paying 15% tax (₹3,000), his actual profit was ₹17,000. He realised taxes reduce returns and decided to learn about tax-friendly investments. 

In India, equity investments are subject to several taxes, including capital gains tax, securities transaction tax, and dividend distribution tax, among others. These taxes can significantly reduce an investor’s overall return on investment.

This blog will explain how taxes affect your money, ways to save on taxes, and how tools like business loans in Mumbai can help you.

What Are Taxes on Investments?

Taxes on investments are amounts paid to the government on earnings. 

For example, if you earn ₹10,000 from shares and the tax rate is 15%, you’ll pay ₹1,500 in taxes.

Different types of investments attract different taxes, such as:

• Capital Gains Tax:

1. 1. • Short-term Capital Gains (STCG): STCG are taxed at 15% if you sell shares within a year. For example, if you earn ₹10,000 profit, you’ll pay ₹1,500 as tax and keep ₹8,500.
      • Long-term Capital Gains (LTCG): LTCG are taxed at 10% for shares held over a year. For example, if your profit is ₹1,50,000, the first ₹1,00,000 is tax-free, and ₹5,000 is taxed.

• Dividend Tax: It means income from shares or mutual funds is taxable. For example, if you earn ₹5,000 as dividends, and the tax rate is 10%, you’ll pay ₹500.
• Interest Income Tax: It applies to returns from FDs, bonds, or savings. For example, if you earn ₹10,000 interest and your tax slab is 20%, you’ll pay ₹2,000.

How Taxes Impact Your Returns

Taxes reduce the actual money you make. Let’s see how:

As you can see, tax-free investments allow you to keep your entire profit, while others reduce returns significantly.

How to Minimise the Tax Burden on Investments

To make the most of your investments, follow these simple strategies:

• Choose Tax-free Investments:

1. 1. • Opt for Public Provident Fund (PPF), Sukanya Samriddhi Yojana (SSY), and tax-free bonds. For example, a PPF investment grows tax-free and offers up to 7.1% returns annually.

• Use Deductions (Section 80C):

1. 1. • Investments like Employee Provident Fund (EPF), National Savings Certificate (NSC), and Equity-Linked Savings Schemes (ELSS) allow tax deductions up to ₹1.5 lakh.

• Use Indexation:

1. • In debt mutual funds, indexation adjusts the purchase price for inflation, lowering taxable gains. For example, if inflation is 5% and your profit is ₹10,000, your taxable gain is reduced by ₹500.

How a Business Loan in Mumbai Helps in Tax Planning

For business owners in Mumbai, taking a business loan in Mumbai can be a smart move to manage taxes and investments.

• Avoid Selling Investments:

1. 1. • If you need money, take a business loan instead of selling investments and paying taxes.

• Tax Benefits:

1. 1. • Interest on business loans is tax-deductible. For example, if you pay ₹50,000 as loan interest, it lowers your income tax significantly.

• Maintain Cash Flow:

1. • A business loan helps you manage expenses without touching long-term investments, avoiding tax-triggering withdrawals.

Facts About Taxes and Investments

1. India’s net direct tax collection grows 22% to Rs 6.93 lakh crore
2. According to a report the 8.5% pre-tax return of an FD may seem more attractive than the 7.3-7.7% offered by the tax-free bonds.

Conclusion: Smart Tax Planning Equals More Savings

Understanding taxes helps grow your wealth. Like Ramesh, you can use tax-free investments, hold assets longer, and claim deductions. Also, a business loan in Mumbai can help manage money without selling investments.

For example, if you save ₹20,000 annually through better tax planning, over 10 years, you’d have an extra ₹2 lakh for your goals. Start planning today because every rupee saved in taxes is a rupee earned for your future!