How to save tax : Investing Benefit

The new financial year is here and its time to put your finances in order. Though you have 12 months to worry about income tax, you will be better off if you take up tax planning right away.

It looks that a big part of our income is going in pockets of ITD ( Income Tax Department) of Indian government. For people having income beyond 3 lacks its more then 30 %. Oops .........its too much buddy.....

So question arises how to save tax as much as you can.

Here i will show you by a simple case study the benefits of investing and its direct effect on your income tax.

Case 1: One of my close friend Mukesh , working with leading automobile company of country got 3.5 lacks as salary during financial year 2006 -- 07. Because of lack of awareness and having little interest in financial issues, he did not save a single penny to save tax.
After a year his tax calculation were like this

Total earnings............................= 3,50,000
Tax exemptions..........................= 1,00,000

Taxable income..........................= 2,50,000

Tax calculations

0 -- 1,00,000..............................= Nil
1,00,000 -- 1,50,000...................= 5,000 ( @ 10 % )
1,50,000 -- 2,50,000...................= 20,000 ( @ 20 % )
2,50,000 -- 3,50,000...................= 30,000 ( @ 30 % )

Total tax.....................................= 55,000
Education cess...........................= 1100 ( @ 2 % )

Tax paid...........................= 56,100

Income after paying tax....= 2,93,900


Case 2 : Ram, a graduate from MNNIT, allahabad joined a MNC in Bangalore with a annual salary of 3.5 lakhs. He has a decent knowledge of finance and also very keen to learn about various investing and tax saving policies. Although he played safe at the end of financial year and got fixed deposit of 1,00,000 rupees for 5 yrs with return of 9 % ( effectively 9.4 %, compounded quarterly).
After a year his tax calculations were like this

Total earnings.........................= 3,50,000
Tax exemptions......................= 1,00,000
Savings ................................. = 1,00,000

Taxable income..................... = 1,50,000

Tax calculations

0 -- 1,00,000.......................... = Nil
1,00,000 -- 2,00,000.............. = 0 ( exemption )
2,00,000 -- 2,50,000............. = 5,000 ( @ 10 % )
2,50,000 -- 3,50,000............. = 20,000 ( @ 20 % )

Total tax .............................. = 25,000
Education cess .............................. = 500 ( @ 2 % )

Tax paid ......................... = 25,500

Returns on savings * ...... = 1,00,000 @ 9 % ( compound interest )
After 1 year ..................... = 1,09,308

Income after paying tax ................ = 3,33,808


Comparing above two cases

Mukesh's Balance after 1 year......= 2,93,900
Ram's Balance after 1 year ...........= 3,33,808

Difference in balance ..........= 39,908

Tax saved by Ram = 30,600

Now if Ram would have not saved 1,0,000 then this 1 lack would have bee
= 1,00,000 - 30,600
= 69,400

So effectively Ram invested 69,400 and he got 1,09,308 after a year. Return on his investment is around 58 % which looks shocking and unbelievable. Also this return is possible when he invested in safest policy i.e. fixed deposits.

Now let me show you some more shocking pictures

1. If Ram would have invested in Mutual funds, with most of them having returns on an average of 20 % and higher, his investment would have been 1,20,000 and return on investment is around 73 %.
2. Acting some more intelligently if after doing some study Ram would have invested in better mutual funds, few have returns as high as 40 %, his investment would have been 1,40,000 and return on investment is around 102 %.
3. If after taking some risk Ram would have invested in Share market which gave a return of 47 % in same financial year, his investment would have been 1,47,000 and return on investment around 112 %

All these figures looks shocking and acts as eye openers, our intelligent and well aware decisions related to financial issues can help us a lot in appreciating our capital in best possible way.

So friends, here i showed you one of the biggest benefits of investing. Still choice is yours................................................ Happy Investing

* To make tax calculation simple few things are eliminated here. For any queries you can always contact me and give your suggestions and feedback.

Note : All figures are in Rupees ( Indian currency ).

For further knowledge about income tax calculations and various exemptions you can visit http://incometaxindia.gov.in/ , the official website of ITD, Indian Government.