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% orSave 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) orRural 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.. 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:
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:
RESULT: The value of the fund at the end of 3 years would be Rs. 11.29 Lacs. 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% orEquity 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.: RESULT: The value of the fund at the end of 3 years would be Rs. 9.51 Lacs. B] If the return is @ 12% p.a.: RESULT: The value of the fund at the end of 3 years would be Rs. 10.08 Lacs. [C] If the return is @ 15% p.a: 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: RESULT: The value of the fund at the end of 3 years would be Rs. 11.28 Lacs. E] If the return is @ 21% p.a: 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”
