Imagine you are the sole breadwinner of your family, earning your income and spending it your way, while the government is a silent partner, reminding you which financial journey belongs to the taxpayer. Apart from the money that we give to the government, the money we spend or visit the bank is also part of the game. From between tax season and planning for the next investment, knowing how to avoid taxes can help you save money.

In my case, I want to tell you one such story. My friend Ravi had ₹1 lakh, which he decided to invest in mutual funds without considering the tax ramifications of such an investment. When he finally let go of his units, he did not expect a big chunk of his profits to go to the tax authorities as a result of paying capital gains tax. Due to the lack of proper planning, this was not able to be averted.

In this blog, we’ll explore the hidden ways tax on income and investments impact your finances. We’ll also link to our earlier article on the Tax Implications of Investing in Mutual Funds for deeper insights.

Understanding the Basics: What is Income Tax?

Every year, the government taxes your salary, business profits, surplus rent, and even the income earned from investments as a part of direct taxation. This is called income tax.

How does it function?

• You make income from many different sources.
• The government charges a specific amount based on the income tax slabs provided for that taxable income.
• You submit an income return to notify the amount earned from all sources and pay the tax therein.

For instance, if you are earning ₹10 lakh per year, then you fall under the 30% tax slab. This signifies that ₹3 lakh would be the tax, and you would only have ₹7 lakh as your earnings after tax.

Key Takeaway: It is imperative to know what tax slab you fall under as it will help you appropriately plan your finances.

How Income Tax Slabs Affect Your Take-Home Pay

The Indian income tax framework functions based on different levels with a higher income being taxed at a higher percentage as per this system.

This is the table detailing the income tax slab for FY 2024-25 & AY 2025-26

Income Range (₹)	Tax Rate
Up to ₹3,00,000	Nil
₹3,00,001 – ₹7,00,000	5% on income exceeding ₹3,00,000
₹7,00,001 – ₹10,00,000	₹20,000 + 10% on income exceeding ₹7,00,000
₹10,00,001 – ₹12,00,000	₹50,000 + 15% on income exceeding ₹10,00,000
₹12,00,001 – ₹15,00,000	₹80,000 + 20% on income exceeding ₹12,00,000
Above ₹15,00,000	₹1,40,000 + 30% on income exceeding ₹15,00,000

Pro Tip: Consider using platforms like Zerodha or Upstox to track your investments effectively and plan for taxes.

The Hidden Impact of Taxes on Your Investments

Taxes can reduce your gross salary and percentage return on investments. Therefore, one should be aware of tax laws and should be fully knowledgeable about the legal side of things, especially if one owns shares in a company, mutual funds, or property.

• Capital Gains Tax: Taxation is done on the profits received from the sale of some specific assets like stocks or real estate.
• Dividend Tax: Dividends that are paid on stocks or mutual funds are taxable.
• Interest Income: Fixed deposits and bonds attract tax of interest income.

As an example, say you get ₹50,000 from the stock sale in one year, it is short-term capital gains and taxed at 15%.

Key Takeaway: Always calculate the return on the amount you have invested considering taxes.

Taxation on Different Investment Types: Mutual Funds, Stocks, and More

There are differences in tax law for different types of investment. Below is a brief overview:

Investment Type	Tax Rule
Equity Mutual Funds	Short-term gains (held <1 year): 15%. Long-term gains (held >1 year): 10% (above ₹1 lakh).
Debt Mutual Funds	Short-term gains: As per your income tax slab. Long-term gains: 20% with indexation.
Stocks	Short-term gains: 15%. Long-term gains: 10% (above ₹1 lakh).
Fixed Deposits	Interest income is added to your income and taxed as per your slab.

Pro Tip: Use Paytm Money or Alice Blue for tax-efficient choices when you start to be an investor in this area.

The Importance of Income Tax Filing and Timely Tax Returns

The filing of your income tax return comes not only as a legal requirement but also as a financial commitment. Here’s what it means:

• No later than will you save money on penalties for paying taxes late.
• The cash you provided can be refunded to you on request if you have paid less in taxes
• Economically, getting a loan or a visa requires a credit record.

My friend Priya gave a true anecdote of how she did her tax return too late and got a ₹10,000 fine. Trust me, don’t become that person!

How to Reduce Your Tax Burden Legally

Taxes are inevitable, but you can legally decrease them. Here is the list of it:

• Utilize tax-saving tools such as ELSS, PPF, or NPS.
• Claim deductions under 80C, 80D and other more sections.
• Use the leverage of the Indexation benefit for long-term investment.

Pro Tip: The thing is, Zerodha and Upstox online platforms provide different tools for tax-saving investment tracking to the users.

The Role of Tax-Advantaged Accounts in Wealth Building

The tax-advantaged accounts such as PPF, NPS, and ELSS allow a man to make a fortune while reducing the payment of taxes.

• PPF: It is an option that gives no tax and deductions under Section 80C.
• NPS: It is for additional deductions under Section 80CCD(1B).
• ELSS: This brings about the harmony of investment returns in equity with the protection of levies on earnings.

Key Takeaway: Contribute to accounts that manage to magnify your interests and at the same time ease you of taxes.

Common Mistakes to Avoid During Income Tax Filing

The mistakes listed below should be avoided to guarantee efficient income tax filing:

• All due dates must be met.
• Completely reporting all income sources is necessary.
• All deductions and exemptions are to be reported.

For instance, my friend slipped up and failed to mention his earnings from flexibility, and he was duly notified by the tax authorities.

Conclusion: Taking Control of Your Taxes and Investments

Taxes are unavoidable, but you may lessen their effects with adequate preparation. Grasp your income tax bracket, select tax-friendly investments, and submit your tax declaration timely. Utilize platforms like Zerodha, Upstox, Paytm Money, and Alice Blue to cut back on your financial burden.

FAQs

What is the gap between short-term and long-term capital gains?

The assets held for one year or less in a shorter duration are donated with short-term gains and long-term ones are held for longer than a year.

How can I avoid paying tax for my salary?

Allocate a certain percentage of your income into tax-saving instruments like ELSS, PPF, or NPS under Section 80C.

Are mutual fund dividends subject to taxation?

Indeed. The income from mutual funds is computed along with your other income and hence is taxed as per your income tax slab.

What are the consequences of not filing taxes before the deadline?

The consequences of late filing include penalties and refusals of refunds.

Can I file my tax return online?

The answer is yes. One can now easily do online filing through Zerodha or Paytm Money.