Latest Expert Exchange Queries
sitemapHome | Registration | Job Portal for CA's | Expert Exchange | Currency Converter | Post Matrimonial Ads | Post Property Ads
 
 
News shortcuts: From the Courts | News Headlines | VAT (Value Added Tax) | Service Tax | Sales Tax | Placements & Empanelment | Various Acts & Rules | Latest Circulars | New Forms | Forex | Auditing | Direct Tax | Customs and Excise | ICAI | Corporate Law | Markets | Students | General | Indirect Tax | Mergers and Acquisitions | Continuing Prof. Edu. | Budget Extravaganza | Transfer Pricing
 
 
 
 
Popular Search: VAT Audit :: form 3cd :: ACCOUNTING STANDARD :: list of goods taxed at 4% :: ARTICLES ON INPUT TAX CREDIT IN VAT :: TDS :: due date for vat payment :: ICAI offer Get Windows 7,Office 2010 in Rs.799 Taxes :: VAT RATES :: empanelment :: articles on VAT and GST in India :: ACCOUNTING STANDARDS :: TAX RATES - GOODS TAXABLE @ 4% :: Central Excise rule to resale the machines to a new company :: cpt
 
 
Indirect Tax »
 Who should you believe on LTCG tax?
 Double Income tax exemption limit to Rs 5 lakh: EY surveya
 Clarifications on the Taxation and Investment Regime for Pradhan Mantri Garib Kalyan Yojana, 2016
 Tax department circular on indirect transfer put on hold
 Rising share of indirect taxes a step back to regressive era
 Double-digit Increase in Direct, Indirect Tax Collection, Says Arun Jaitley
 What is Direct tax?
 Indirect tax mop-up rate slows after note ban, Jaitley dismisses slowdown
 Tax buoyancy improves, thanks to indirect levy
 FM may unveil GST timeline, state compensation corpus on Feb 1
 Direct and indirect tax collection to exceed budget estimates this fiscal: Jaitley

Understanding tax inefficient instrument
December, 29th 2014

There are many tax inefficient instruments that are available in the market. Many people invest in them which ends up being a drag as far as the overall tax planning efforts are concerned. The question that most people grapple with is what is the meaning of tax inefficiency and how can one actually understand that they are faced with such a situation. This is crucial because once the problem is identified then the individual can ensure that he stays clear of these and choose more appropriate investments which are actually suitable for his tax saving requirements. Here is a closer look at how this can be defined for easier use by the individual.

No tax deduction

One of the tax benefits that a lot of investments possess is that they provide a tax deduction to the individual when the amount is actually invested. The deduction is nothing but a reduction of the taxable income of the individual so that the final base for the calculation of the taxes is low. This ensures that they are getting a tax relief every time the investment is made. A lot of people actually end up not completing the total deduction limits that they are eligible for under the Income Tax Act and this can lead to a missed opportunity. This is the first step in which the inefficiency starts. However one has to understand that not all instruments will have a tax deduction and just because this is absent does not mean that the investment is not suitable for the individual. This kind of analysis is valid only when one is looking at the investment efficiency from the tax point of view and not when evaluating it from the overall suitability point of view where the tax benefit does not matter or is not primary in the whole scheme of things.

Earnings are taxable

Another way in which the inefficiency creeps into the tax aspect is that the earnings that are given by the instrument are actually taxable in the hands of the individual. This would mean that there is no tax relief of any kind when the earnings are considered and this results in the full amount of the tax burden coming on them. There are several routes like tax free bonds on the debt front and long term equity holdings where the tax rate is zero and this can make a huge difference to the final rate of return that is actually earned by the individual especially for those who fall into the higher tax brackets. Most instruments will have their earnings taxable but this does not make them unfit for selection but one has to see carefully the kind of impact that these would have on the overall decision making process.

No cash outflow

There can be a double hit for the investor if the earnings are fully taxable and at the same time these are not paid out till the maturity of the instrument. This means that every year the individual would have to include the amount that is earned in their tax returns and actually pay tax on this amount while the earnings come into their hands years later when the instrument actually matures. This can lead to a mismatch in terms of the cash flow for the individual because they are forced to make the tax payment from other sources while the income is actually locked up for quite some time to come. This is another way in which inefficiency comes into the investment. At the end of the day just the presence of an inefficiency does not make an investment worthless but one has to ensure that all the conditions are considered carefully while making an investment especially when the aim is to save taxes.

 
 
Home | About Us | Terms and Conditions | Contact Us
Copyright 2017 CAinINDIA All Right Reserved.
Designed and Developed by Binarysoft Technologies Pvt. Ltd.
Binarysoft Technologies - Our Portfolio

Transfer Pricing | International Taxation | Business Consulting | Corporate Compliance and Consulting | Assurance and Risk Advisory | Indirect Taxes | Direct Taxes | Transaction Advisory | Regular Compliance and Reporting | Tax Assessments | International Taxation Advisory | Capital Structuring | Withholding tax advisory | Expatriate Tax Reporting | Litigation | Badges | Club Badges | Seals | Military Insignias | Emblems | Family Crest | Software Development India | Software Development Company | SEO Company | Web Application Development | MLM Software | MLM Solutions