‘Axe the tax’
Why evade tax, it's for your own good
WHATS UP BY SAJAD BAZAZ
For employees, particularly government employees, maddening February is just a week away. The month is maddening in the sense that almost everyone among them gets automatically busy in financial planning to scissor income tax. Those falling in the income tax net once again gear up to make this February a very sane one. However, the key is to understand how tax-saving investments could fit into ones finances and adopt approaches that will help to choose the right tax-saving investments.
If it is worrisome for employees on account of income tax liability, it is merry making time for various media channels, as they get some extra ad business highlighting income tax saving options of various financial institutions. Even exclusive editions/ programmes sponsored by some companies about the ‘best’ tax savers available in the market. One cannot ignore huge hoardings carrying benefits of tax saver options erected in busy market places and where the footfall is huge.
Sometime back some hoardings at strategic locations in the Srinagar city highlighting an investment instrument carried a slogan – ‘Axe the Tax’. Basically the hoarding was carrying an offer to save income tax. This slogan attracted a young boy in a busy market place who was accompanying his parents. The boy was curious to know about the tax saving. ‘Why invest and save tax’? This was a direct question posed by the boy to his parents. Even as the father tried to make his son understand the working of tax saving and the investing thing, the boy couldn’t grasp the terminology and understanding this income tax business was beyond his comprehension. Basically, the father had half-baked knowledge about tax and its planning. The point here is that income tax saving matters constitute an integral part of financial literacy and understanding the tax saver options and above all the tax itself is most important for everyone.
Today, we see a large number of young people parking their money in various investment instruments with a main reason to save tax! And it is by default that the youth go for saving some money.
As far as tax saver instruments are concerned, there are certain things in which government wants its citizens to invest. Some of the things that the government wants them to invest in are for their own good. While there are other things, which are for the welfare of the nation. So to encourage people to invest their money in the “these certain things” the government exempts them for income tax.
What is income tax? This was a basic question which the boy asked his parents. This is all about the money one earns. One has to basically pay a portion of what one earns to the government. Suppose an employee or a businessman earns Rs.50,000 every month, he will have to pay a part or a “percentage” of that money to the government. The percentage that one has to pay depends on the “tax bracket” one falls in.
So, what is a tax bracket? First let’s understand that rich people can afford to give more money towards the development of the country and poor people cannot give much. There is another category of people who are really poor people and cannot give anything at all since they are themselves struggling financially. So, the people are categorized on the basis of how much income they make. They may be “very poor” or “poor” or “rich” or “very rich”. If one falls in the “very rich” category then one has to pay a higher percentage of his income towards the development of his county. “Very poor” category does not have to pay anything. So, this is basically what tax brackets are. The percentage of one’s income, which one has to pay, is “income tax” and this percentage depends on how much one makes or which “tax bracket” one falls in.
However, there are legal ways of paying less tax than what one is supposed to pay. And this way is through “investments”. If one invests part of his income into government bonds, infrastructure bonds, life insurance, bank fixed deposits etc. then ones income will reduce. This means he has to pay less income tax.
The investment in these tax saving things does not just go away. On is actually creating an asset that produces money. So, instead of losing the earning power of the money by paying income tax, one could use the money to create an asset and also save tax.
Once you have calculated your tax liability for this year, you will exactly know how much you have to save to minimize your tax outgo. If you are short of liquid surplus funds to invest, you can simply go ahead and pay your tax. If you have surplus funds you can invest in medium and long term instruments to avail tax rebate under Section 80C.
Investment of the maximum allowed amount of Rs. one lakh in one or mix of Section 80C instruments reduces the taxable income by Rs.30,900 and Rs.33,900 if the income tax rate is 30.9 per cent and 33.99 per cent, respectively. Now there are financial products/ instruments available in the market, which not only saves tax but also ensures good returns.
Investment in public provident fund scheme enjoys tax relief in the form of deductions, while the interest too is not taxable. Even the money received at the time of maturity too is not taxable. Precisely, contribution, accumulation and withdrawal are exempt from tax.
The tax treatment is different for notified tax saving bank fixed deposits, National savings certificates and Senior Citizens schemes. The investment made in these instruments qualifies for exemption at the time of contribution, but the interest earned is taxed on accrual basis, that is on each year basis.
So it’s important for you to establish your tax planning strategy, which should essentially be linked to your medium- and long-term financial goals. If you want to strike a right balance between your investment growth and tax management, then it is important to start right away.
Lastly, a word of caution for those who fall in the income tax bracket. Make your general investments in tax- efficient instruments. Be punctual in making your tax investment declarations to your employer supported by your investment proofs. To axe the tax, consult a good tax consultant before taking any major financial decisions. Maintain your yearly financial documents properly and fulfill all compliance requirements, such as timely filing of tax returns. After all, free of tax worries means peaceful life.
Lastupdate on : Sat, 22 Jan 2011 21:30:00 Makkah time
Lastupdate on : Sat, 22 Jan 2011 18:30:00 GMT
Lastupdate on : Sun, 23 Jan 2011 00:00:00 IST
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