Paying Tax is better than Saving Tax! – Check out How?

Paying Tax is better than Conserving Tax!, Here we are discussed various Approaches for Conserving Tax in India, In this post we discussed Can Paying Tax is better than Saving Tax, How to Save Earnings Tax in India, Why we pay tax immediate of saving of Tax, Recently we talked about “Earnings from Home Home

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LTCG: PAYING TAX MAY BE BETTER THAN SAVING TAX

THE FACT:

  • Long Term Capital Gain (LTCG) is blatantly taxable @ 20%.
  • No deduction under Chapter VIA (like u/s 80 C towards PPF/LIC/NSC etc) is readily available versus the Long term capital gain.

TAX CONSERVING OPTIONS:

A tax payers having long term capital gain have the following 2 choices:

  • Pay Tax @ 20% or
  • Save Tax by investing in Approved mode.

CONSERVING LTCG TAX U/S 54 EC:

One of the most popular tax conserving choice for all spectrum of tax payers is to save tax by investing the LTCG in the bonds released by the

  • National Highway Authorities of India (NHAI) or
  • Rural Electrification Corporation (REC).

This are very frequently described as the “54 EC Bonds”.

The optimum amount that can be invested in such bonds is Rs. 50 Lacs p.a. Currently, Interest provided by NHAI/REC on this bond is around 6% p.a.

The fund has an opportunity expense. The fund, if not invested in the 54 EC bonds, can be used somewhere else having greater return viewpoints.

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The concerns stays: Is it worth Purchasing the bonds thinking about such a lower rate of interest used?

This is especially more crucial in the present situation where
a] Bank FDR offers returns in the range of 9% to 11% p.a.
b] Mutual Funds/ Equity investment offering returns in the series of 15% to 20% p.a.
c] Company or Gold/ Silver or Other Investment yielding more than 20% p.a.

Of the 2 choices offered with the tax payer, paying or conserving, which agrees with? At what rate of return, paying tax is much better than conserving tax?

Let us analyze the case of Mr. X who has actually made a Long term capital gain of Rs. 10 Lacs during the F.Y. 2010-11 For the sake of simplicity, it is presumed that other earnings of Mr. X is in 30% tax bracket (i.e., 30.90% with Education Cess).

1 st OPTION:

SAVE TAX BY INVESTING IN THE 54 EC BONDS:

  • The rates of interest provided by the bonds is around 6% p.a.
  • After investment, the Long term capital gain tax liability would be Nil.
  • X have entire quantity of Rs. 10 Lacs to buy the Bonds.
  • The interest income from this bond is taxable.
  • The worth of 10 Lacs invested on 31.032011 @ 6% p.a. would be as under:
1000000 Interest used 6.00% YEAR I II III OVERALL Value of the Fund at the start of the year [a] 1000000 1041460 1084639 Interest Earnings [b] 60000 62488 65078 187566 Tax on Interest Income[c] 18540 19309 20109 57958 Interest ater Tax [d] = [b-c] 41460 43179 44969 129608 Value of the Fund at the Year End [e] = [a+d] 1041460 1084639 1129608 1129608

RESULT: The value of the fund at the end of 3 years would be Rs. 11.29 Lacs.

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2 nd CHOICE:

PAY TAX @ 20% & INVEST THE QUANTITY IN OTHER PLACES:

If Mr. X pays tax @ 20.60% (consisting of 3% of education cess). He would be required to pay tax of Rs.

The various investments option could be of Investment in:

  • Bank FDR with interest in the variety of around 9% to 10% or
  • Equity Market/ shared fund or in the business where the yield could vary relying on the market conditions or the business prospective. Business people usually prefer to invest the quantity in the business where they may able to make even more than 20% return on the capital.

Let us compare the value of Rs. 7.94 Lacs invested by Mr. X at various rate

A] If the return is @ 9% p.a.:

794000 Interest used 9.00% YEAR I II III OVERALL Value of the Fund at the start of the year [a] 794000 843379 895829 Interest Earnings [b] 71460 75904 80625 227989 Tax on Interest Earnings [c] 22081 23454 24913 70448 Interest ater Tax [d] = [b-c] 49379 52450 55712 157541 Worth of the Fund at the Year End [e] = [a+d] 843379 895829 951541 951541

OUTCOME: The worth of the fund at the end of 3 years would be Rs. 9.51 Lacs.

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B] If the return is @ 12% p.a.:

79400000 Interest provided 1200% YEAR I II III OVERALL Value of the Fund at the beginning of the year [a] 794000 859838 931136 Interest Income [b] 95280 103181 111736 310197 Tax on Interest Income [c] 29442 31883 34526 95851 Interest ater Tax [d] = [b-c] 65838 71298 77210 214346 Worth of the Fund at the Year End [e] = [a+d] 859838 931136 1008346 1008346

OUTCOME: The value of the fund at the end of 3 years would be Rs.

Must Check Out– Earnings of Other Persons consisted of in our Income

[C] If the return is @ 15% p.a:

79400000 Interest provided 1500% YEAR I II III TOTAL Value of the Fund at the beginning of the year [a] 794000 876298 967126 Interest Earnings [b] 119100 131445 145069 395614 Tax on Interest Earnings [c] 36802 40617 44826 122245 Interest ater Tax [d] = [b-c] 82298 90828 100243 273369 Worth of the Fund at the Year End [e] = [a+d] 876298 967126 1067369 1067369

OUTCOME: The worth of the fund at the end of 3 years would be Rs.

D] If the return is @ 18% p.a:

Quantity Invested Rs. 79400000
Interest used 1800% 1800% 1800%
YEAR I II III OVERALL
Worth of the Fund at the start of the year [a] 794000 892758 1003799
Interest Income [b] 142920 160696 180684 484300
Tax on Interest Income[c] 44162 49655 55831 149648
Interest ater Tax [d] = [b-c] 98758 111041 124853 334652
Value of the Fund at the Year End [e] = [a+d] 892758 1003799 1128652 1128652

RESULT: The value of the fund at the end of 3 years would be Rs. 11.28 Lacs.

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E] If the return is @ 21% p.a:

Amount Invested Rs. 79400000
Interest used 2100% 2100% 2100%
YEAR I II III OVERALL
Value of the Fund at the beginning of the year [a] 794000 909217 1041154
Interest Income[b] 166740 190936 218642 576318
Tax on Interest Earnings [c] 51523 58999 67560 178082
Interest ater Tax [d] = [b-c] 115217 131937 151082 398236
Value of the Fund at the Year End [e] = [a+d] 909217 1041154 1192236 1192236

RESULT: The worth of the fund at the end of 3 years would be Rs.

Now back to the location from where we have actually moved. What should Mr. X do?

If Mr. X is able to make the return of more than 18.05% p.a., he might conclude that

” PAYING TAX IS BETTER THAN SAVING TAX”

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