Paying Tax is better than Saving Tax!

Paying Tax is better than Saving Tax!, Hi Friends Here we are discussed various Methods for Saving Tax in India, In this article we discussed Can Paying Tax is better than Saving Tax, How to Save Income Tax in India, Why we pay tax instant of saving of Tax, Recently we discussed “Income from House Property – Taxation and Deductions” Now you can scroll down below and check more details for Paying Tax is better than Saving Tax!

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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 80C towards PPF/LIC/NSC etc) is available against the Long term capital gain.

TAX SAVING OPTIONS:

A tax payers having long term capital gain have the following two options:

Pay Tax @ 20% or

Save Tax by investing in Approved mode.

SAVING LTCG TAX U/S 54EC:

One of the most popular tax saving option for all spectrum of tax payers is to save tax by investing the LTCG in the bonds issued by the

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

This are very commonly referred to as the “54EC Bonds”.

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

The fund has an opportunity cost. The fund, if not invested in the 54EC bonds, can be utilized elsewhere having higher return perspectives..

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The questions remains: Is it worth Investing in the bonds considering such a lower rate of interest offered?

This is particularly more important in the current scenario where
a] Bank FDR offers returns in the range of 9% to 11% p.a.
b] Mutual Funds/ Equity investment offering returns in the range of 15% to 20% p.a.
c] Business or Gold/ Silver or Other Investment yielding more than 20% p.a.

Of the two options available with the tax payer, paying or saving, which is favorable? At what rate of return, paying tax is better than saving tax?

Let us analyze the case of Mr. X who has earned 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 income of Mr. X is in 30% tax bracket (i.e., 30.90% with Education Cess).

1st OPTION:

SAVE TAX BY INVESTING IN THE 54EC BONDS:

  1. The interest rate offered by the bonds is around 6% p.a.
  2. After investment, the Long term capital gain tax liability would be Nil.
  3. X have entire amount of Rs. 10 Lacs to invest in the Bonds.
  4. The interest income from this bond is taxable.
  5. The value of 10 Lacs invested on 31.03.2011 @ 6% p.a. would be as  under:
Amount Invested Rs.1000000   
Interest offered6.00%6.00%6.00% 
YEARIIIIIITOTAL
Value of the Fund at the beginning of the year [a]100000010414601084639 
Interest Income [b]600006248865078187566
Tax on Interest Income  [c]18540193092010957958
Interest ater Tax [d] = [b-c]414604317944969129608
Value of the Fund at the Year End [e] = [a+d]1041460108463911296081129608

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

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2nd OPTION:

PAY TAX @ 20% & INVEST THE AMOUNT ELSEWHERE:

If Mr. X pays tax @ 20.60% (including 3% of education cess). He would be required to pay tax of Rs. 2.06 Lacs & would be left with amount of Rs. 7.94 Lacs to invest elsewhere.

The various investments option could be of Investment in:

  • Bank FDR with interest in the range of around 9% to 10% or
  • Equity Market/ mutual fund or in the business where the yield could vary depending upon the market conditions or the business prospective. Businessmen normally prefer to invest the amount in the business where they may able to earn even more than 20% return on the capital.

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

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

Amount Invested Rs.794000   
Interest offered9.00%9.00%9.00% 
YEARIIIIIITOTAL
Value of the Fund at the beginning of the year [a]794000843379895829 
Interest Income [b]714607590480625227989
Tax on Interest Income [c]22081234542491370448
Interest ater Tax [d] = [b-c]493795245055712157541
Value of the Fund at the Year End [e] = [a+d]843379895829951541951541

RESULT: The value 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.:

Amount Invested Rs.794000.00   
Interest offered12.00%12.00%12.00% 
YEARIIIIIITOTAL
Value of the Fund at the beginning of the year [a]794000859838931136 
Interest Income [b]95280103181111736310197
Tax on Interest Income [c]29442318833452695851
Interest ater Tax [d] = [b-c]658387129877210214346
Value of the Fund at the Year End [e] = [a+d]85983893113610083461008346

RESULT: The value of the fund at the end of 3 years would be Rs. 10.08 Lacs.

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

Amount Invested Rs.794000.00   
Interest offered15.00%15.00%15.00% 
YEARIIIIIITOTAL
Value of the Fund at the beginning of the year [a]794000876298967126 
Interest Income [b]119100131445145069395614
Tax on Interest Income [c]368024061744826122245
Interest ater Tax [d] = [b-c]8229890828100243273369
Value of the Fund at the Year End [e] = [a+d]87629896712610673691067369

RESULT: The value of the fund at the end of 3 years would be Rs. 10.06 Lacs.

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

Amount Invested Rs.794000.00   
Interest offered18.00%18.00%18.00% 
YEARIIIIIITOTAL
Value of the Fund at the beginning of the year [a]7940008927581003799 
Interest Income [b]142920160696180684484300
Tax on Interest Income  [c]441624965555831149648
Interest ater Tax [d] = [b-c]98758111041124853334652
Value of the Fund at the Year End [e] = [a+d]892758100379911286521128652

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.794000.00   
Interest offered21.00%21.00%21.00% 
YEARIIIIIITOTAL
Value of the Fund at the beginning of the year [a]7940009092171041154 
Interest Income  [b]166740190936218642576318
Tax on Interest Income [c]515235899967560178082
Interest ater Tax [d] = [b-c]115217131937151082398236
Value of the Fund at the Year End [e] = [a+d]909217104115411922361192236

RESULT: The value of the fund at the end of 3 years would be Rs. 11.92 Lacs.

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

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

“PAYING TAX IS BETTER THAN SAVING TAX”

About CA Ridhi Dhoot

The writer is a Chartered Accountant & a Licentiate Company Secretary. You can reach out to her at ca.ridhidhoot@gmail.com

2 comments

  1. Respected,

    Nice plus Helpful article present by you about saving tax.

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