The efficiency of the portfolio returns also depends on Taxes on investment - a crucial component of investment management. We consider the impact of taxes on all the investment recommendations that are proposed and try to optimise the post tax returns by adopting appropriate investment strategies to minimise the tax. We also provide the year end income and capital gains statements that are required for computing and filing tax return. We have tied up with reputed chartered accountants for filing the income tax returns. We also help our clients in computing and filing of income tax returns.

The Indian Taxation System

The Indian taxation system is built to ensure fairness while generating revenue for the government. It consists of direct taxes like income tax and indirect taxes like GST. Below, we will focus on how income is taxed, especially regarding property and capital gains, in a way that's easy to understand.

Income Taxes in India

Income tax is paid on the income earned by individuals, companies, or other entities. The government has introduced two tax regimes:

• Old Tax Regime: Allows deductions like those under Section 80C (e.g., investments in LIC or PPF), 80D (health insurance premiums), and HRA (House Rent Allowance).

• New income tax regime applicable from FY 2023-24 (AY 2024-25):

New Tax Regime Slabs and Rates

The government introduced a revised version of the new tax regime in Budget 2023 to simplify tax filing. It offers lower tax rates but removes most exemptions and deductions available under the old regime.

Key Features of the New Tax Regime:

• Standard Deduction: Increased from 50000 to 75000

• National pension scheme : employer contribution u/s 80CCD increased from 10% to 14% of the salary for private sector employees.

NOTE: While the new tax regime offers simplicity, individuals must compare their tax liability under both regimes to determine the most beneficial option.

Taxation on Income from Property

If you own property and earn rental income, it is taxed under "Income from House Property." Here's how it works:

Gross Annual Value (GAV):

This is the total rent you receive in a year or the notional rent (market value) for vacant property.

Deductions Allowed:

• Municipal Taxes Paid: Property tax paid to the local authority is deducted from GAV.

• Standard Deduction of 30%: A fixed 30% deduction is allowed for maintenance costs, irrespective of your actual expenses.

• Home Loan Interest: You can claim up to Rs. 2 lakh annually for interest paid on a home loan under Section 24(b).

Self-Occupied Property:

If you live in the property, there's no rental income, but you can still claim a deduction on the home loan interest.

Example: If you receive Rs. 10 lakh as annual rent and pay Rs. 1 lakh in property taxes, your taxable income becomes:

Rs. 10,00,000 - Rs. 1,00,000 = Rs. 9,00,000

From this, 30% (Rs. 2,70,000) is deducted, leaving Rs. 6,30,000 as taxable income.

Taxation on Capital Gains

When you sell assets like property, stocks, or gold for more than what you paid, the profit is called a capital gain. These gains are classified as:

Short-Term Capital Gains (STCG):

• Applies to assets sold within a short holding period (e.g., stocks sold within 1 year, property sold within 3 years).

• Taxed as per your income tax slab.

• For stocks, a fixed 20% tax applies (if sold on the stock exchange).

Long-Term Capital Gains (LTCG):

• For assets held for a longer period (e.g., property for more than 3 years, stocks for more than 1 year).

• Tax Rates:

  • Property and gold: 20% (after indexation).

  • Stocks: 12.5% on gains above Rs. 1 lakh (no indexation).

• Indexation Benefit: To adjust for inflation, the government lets you calculate the asset's value based on today's prices, reducing your taxable profit.

Exemptions to Save Tax:

• Section 54: If you sell a residential property and use the money to buy another property within a specific time, you can avoid paying LTCG tax.

• Section 54EC: Investing in bonds like NHAI or REC (with a 5-year lock- in) can also exempt LTCG tax.

Example:

If you bought a property for Rs. 50 lakh in 2010 and sold it for Rs. 1 crore in 2023, the profit (capital gain) is Rs. 50 lakh. However, with indexation, the cost may be revised to Rs. 70 lakh, and you'll pay tax on Rs. 30 lakh at 20%.

Simplified Takeaway

• Income from property includes rental income, which is taxed after deducting maintenance costs and taxes.

• Capital gains tax applies when you profit from selling assets, with lower rates for long-term holdings and options to save tax through reinvestments.

• Staying informed about tax exemptions and rebates can significantly reduce your tax liability.