How to assess your tax impact while choosing investment vehicles

livemint.com:

₹48 lakh and long-term capital gains of ₹6 lakh had been booked in December 2022. At a 10 % long-term capital gain tax, with ₹1 lakh exemption, my client was happy that the extra tax liability was only ₹50,000. To his surprise, his chartered accountant asked him to deposit ₹1.65 lakh extra in taxes.

The tax payable was more than four times the amount anticipated by my client, from ₹50,000 to ₹2.15lakh. The culprit was the capital gain that took his total income above ₹50 lakh, a slab that attracts a 10% surcharge on total taxes. My client ended up paying ₹2.15 lakh in taxes, thereby wiping away part of the capital gains made.

If he fell in the higher income bracket, this impact could be much higher. For example, if he had an income of ₹1.95 crore, a capital gain of ₹ 6lakh could impact his total taxes by ₹6.8 lakh ( wiping out the entire capital gain made). Your tax situation is a vital criterion in the selection of investment products.

While HNIs (high net worth individuals) flock to PMS due to customized portfolio construction, the benefits of such unique portfolios have to be evaluated against the costs associated with them. Taxation on capital gains is inevitable, but like in my client’s case, it can have an adverse impact on overall tax outgo. If you have made a one-time large professional or business income, or if you have had a property sale or any similar large income in a year or if you belong to the higher income slabs, the impact of unplanned capital gains can be severe.