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Income-tax of Rs.2,87,370 on Family Income of Rs.27,60,000

Average tax rate of just 10.4% – Myth or Reality?


Just consider some tax facts of the past six years as highlighted hereunder:

  • In FY 2004-05, taxable income exceeding Rs.1,50,000 attracted the maximum tax rate of 30%.
  • Today in FY 2010-11, the basic Income-tax exemption limit is Rs.1,60,000 and the maximum tax rate of 30% is attracted only if the taxable income exceeds Rs.8,00,000.
  • In FY 2004-05, the Income-tax payable on taxable income of Rs.8,00,000 was  Rs.2,18,280, on the basis of which the average rate of tax worked out to 27.29%.
  • Today in FY 2010-11, the Income-tax payable on the same taxable income of Rs.8,00,000 is Rs.96,820, resulting in an average tax rate of 12.10%. 

Thus, during the past six years, taxpayers earning taxable income of Rs.8,00,000 or more, have effectively enjoyed a tax relief of Rs.1,23,600. 

          Imagine yourself to be on Kaun Banega Crorepati’s (KBC’s) Hot Seat and Big B asking you this Rapid Fire Question: ‘How much Income-tax would you need to pay in FY 2010-11 on Taxable Family Income of Rs.27,60,000?’  You are given your four choices A – Rs.4,26,420; B – Rs.5,68,560; C – Rs.2,87,370 and D – Rs.8,52,840.

            Your tax-saving instinct would tempt you to go for the lowest sum of Rs.2,87,370, though you would not be sure how to justify it?  Much to your delight, you would be told ‘Aapka Jawab bilkul sahi hai!’

             Believe it or not, but it is true! As the following illustration will highlight, it is now possible for a family of an Individual, his Wife and his Hindu Undivided Family (HUF) to earn collectively taxable income of Rs.27,60,000 and end up paying income-tax of only Rs.2,87,370, at an average rate of just around 10.4%.

 Illustration:  Mr. TP, Mrs. TP and the HUF of TP plan to earn taxable income of Rs.9,20,000 in each case, totaling to Rs.27,60,000 in all.  They plan to make savings and allocations of Rs.1 lakh in each case and avail the benefit of deduction under Section 80C.  They also plan to make investment of Rs.20,000 each in long-term infrastructure bonds and avail the benefit of deduction under Section 80CCF. On the taxable balance of Rs.8,00,000 in the three cases, as per the new tax rates as effective from FY 2010-11, the Income-tax (including 3% Education Cess)  payable would be Rs.96,820 each in the case of Mr. TP and his HUF and considering the additional tax concession available to Mrs. TP, being a lady taxpayer, she would be required to pay Rs.93,730.  Thus the tax for the three would total to Rs.2,87,370 (96,820+96,820+93,730), at an average rate of just around 10.4%.

              Even after allocating the resources of Rs.3,00,000 for deduction under Section 80C, Rs.60,000 for deduction under Section 80CCF and the tax payment of Rs.2,87,370, the TP family would still enjoy a liquidity of Rs.21,12,630, giving them the freedom to spend more than Rs.1,76,053 per month, the way they like.

           The above illustration has not taken into consideration other commonly availed deductions like payment of premium for medical insurance of upto Rs.15,000 under Section 80D, deduction of upto Rs.1,50,000 under Section 24 for payment of interest on housing loan, etc.

           Also not taken into consideration is the scope of earning additional incomes by way of PPF interest, dividends and long term capital gains from listed securities, which are totally exempt from income-tax under Section 10.  Moreover, if either Mr. TP or Mrs. TP is a salaried employee, he or she can plan to receive specified allowances and perquisites which are also tax exempt.

          This article clearly goes to highlight that it is indeed possible to maintain high levels of income with low levels of tax, if imaginative tax and investment planning are resorted to and literally ‘enjoy freedom from tax burden!’

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