In India the Income tax calculation is quite complicated. There are different slabs with varying percentages, then surcharges, education and health cess etc. Do you know what is the cumulative effect of all these various percentages on your net income?

Effective income tax rate is the percentage value of your final tax amount by your net taxable income after all deductions. This gives a clear picture of what percentage of your income is going to the government.

This analysis is not only a fun way to feel proud or… maybe sad. This also useful to make decisions like should I take home loan or pay it out of pocket? Yup sometimes taking loan is actually more economical!

First let us look at the tax amounts for taxable income ranging from zero to 5Cr, in FY 2020-2021.

See the Pen Effective Income Tax rate by Nirupam (@applegrew) on CodePen.

Next let’s look at the effective tax rate for zero to 6Cr net taxable income range. (In both the graphs the blue line is when the “new-regime” tax slab is used, and the orange line for “old regime”). The comparison for both the regimes are here – Deep dive into new tax regime of Budget 2020.

See the Pen Effective Income Tax rate by Nirupam (@applegrew) on CodePen.

In the above graph the first cliff comes at 50L mark, then at 1Cr (which is mentioned as 10M on the graph), lastly at 2Cr mark. At 2Cr the effective tax rate is whooping 43%!

## Scenario: Home loan vs paying out of pocket

Now let us say you are earning 1.5Cr a year. You want to buy a 2Cr worth house (inclusive of all fees). You are able to save 1Cr a year. So that means you can pretty much pay for the house out of pocket in two years. Also since house is under construction which will need next 3years to actually complete. In this case we will talk in context of two different situations.

You take a home loan 1.6Cr for at 7.2% for 20years. Let’s use our calculator from Calculating Amortisation Schedule of your loans. You will need to pay back total 3,02,34,176 over the course of 20years. (Plus some processing fees, which would be small in comparison here). So your total expenditure would be 3.02Cr + 40L (out of pocket) = 3.42Cr.

Instead let’s say you paid for the full amount out of pocket then the cost of house would had be exact 2Cr.

However, in the case where you took loan, if you had invested the 1.6Cr amount in Mutual Funds, which typically returns about 12%; you would have got 12.3Cr at the end of 18years! (Assuming it took two year to accumulate 1.6Cr after all expenses.) Even if you invest in the safest MFs like Liquid funds which gives a typical return of 5% you would have got 3.85Cr at the end of 18yrs. 3.85-3.42 = 43L. Means you got the house practically for free with 43L to spare. OR more than 8Cr to spare in former case.

Not only that you would save on taxes due to deductions due to home loan under 80C and section 24.

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