Paying Tax is better than Saving Tax!, 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
LTCG: Paying Tax is 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..
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:
The interest rate offered by the bonds is around 6% p.a.
After investment, the Long term capital gain tax liability would be Nil.
X have entire amount of Rs. 10 Lacs to invest in the Bonds.
The interest income from this bond is taxable.
The value of 10 Lacs invested on 31.03.2011 @ 6% p.a. would be as under:
Amount Invested Rs.
1000000
Interest offered
6.00%
6.00%
6.00%
YEAR
I
II
III
TOTAL
Value of the Fund at the beginning of the year [a]
1000000
1041460
1084639
Interest Income [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.
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 offered
9.00%
9.00%
9.00%
YEAR
I
II
III
TOTAL
Value of the Fund at the beginning of the year [a]
794000
843379
895829
Interest Income [b]
71460
75904
80625
227989
Tax on Interest Income [c]
22081
23454
24913
70448
Interest ater Tax [d] = [b-c]
49379
52450
55712
157541
Value of the Fund at the Year End [e] = [a+d]
843379
895829
951541
951541
RESULT: The value of the fund at the end of 3 years would be Rs. 9.51 Lacs.
