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
Material in this Post.
LTCG: PAYING TAX MAY BE BETTER THAN SAVING TAX
- 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:
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.:
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.:
OUTCOME: The value of the fund at the end of 3 years would be Rs.
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[C] If the return is @ 15% p.a:
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|
|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|
|Value of the Fund at the beginning of the year [a]||794000||909217||1041154|
|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”