Tax Sav­ings That Do not Ac­tu­ally Help Save Much

The Economic Times - - Finance & Commodities -

ever, it so hap­pens that even a cur­sory ex­am­i­na­tion re­veals th­ese bonds to be a most use­less in­vest­ment. Ba­si­cally, if you have cap­i­tal gains from the sale of an as­set, you can avoid pay­ing cap­i­tal gains on it by in­vest­ing up to .₹ 50 lakh in th­ese bonds that are is­sued by NHAI and REC. The bonds are for three years and earn a mere 6% in­ter­est, which is it­self tax­able. Since most in­vestors are in the top tax bracket, they ef­fec­tively earn 4% from th­ese bonds, which, over three years, is a post-tax op­por­tu­nity loss of at least 10% com­pounded, even when com­pared to a debt fund.

It so hap­pens that if you had paid cap­i­tal gains tax on the orig­i­nal gains, af­ter al­low­ing for cost in­fla­tion, you would ei­ther gain a bit, or at the very least, break even with th­ese cap­i­tal gains bonds. You would have the money avail­able for de­ploy­ing in other more use­ful ac- tiv­i­ties right away, in­stead of be­ing locked for three years. Many peo­ple who are in this sit­u­a­tion un­der­stand this and yet buy cap­i­tal gains bonds. Why? Be­cause it saves tax. This be­hav­iour, as well as var­i­ous ob­ser­va­tions dur­ing the de­mon­eti­sa­tion pe­riod, has made me come to the con­clu­sion that rich In­di­ans have a patho­log­i­cal ha­tred of pay­ing taxes, even if it makes no fi­nan­cial sense.

Look­ing at the above ex­am­ple, it’s crys­tal clear that the cap­i­tal gains bonds are ef­fec­tively not tax-free. By pay­ing you a pit­tance as in­ter­est (and then tax­ing that in­ter­est as in­come), the gov­ern­ment is ac­tu­ally tax­ing you fully, spe­cially when you con­sider that the bond is­su­ing en­ti­ties would oth­er­wise have to be funded by the gov­ern­ment.

Cap­i­tal gains bonds are a bad in­vest­ment. How­ever, peo­ple who are oth­er­wise fi­nan­cially smart keep fall­ing for it just be­cause they have a ‘tax sav­ing’ la­bel on them.

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