As a taxpayer, our most queries are about how to reduce tax burden, how we can save tax as much as we can and it should be achieved legally.
It is not only in Bangladesh; world top richest men also want to reduce their tax amount. Guess, few months ago you have read news about Elon Musk who is now the top richest man in the world, shifting to Texas from California. And the reason is to save state personal income tax. The other two top richest men Bill Gates and Jeff Bezos are living in Washington D.C. where the state personal income tax is zero. And also, recent past US president Donald Trump is looking for such state where he does not have to pay state personal income tax.
So, why you will not plan to save tax as much as you can legally?
Why we are saying legally?
Because, everything we do have to abide by law otherwise have to face legal consequences. The benefits exist in the current tax law and you have to avail these facilities to reduce tax. Only you have to know where the tax benefits are existed. If any taxpayer hides their income or assets to avoid tax burden then penalty and punishment may impose to taxpayer in future if tax authority can discover the concealment of such income or assets.
Reading our blogs, watching videos in our YouTube Channel and participating our online tax courses in this website, most of the common question is how I can save tax legally?
But when we prepare tax return of individual taxpayers or providing consulting services to taxpayers about any complex tax issues noticed that most of the cases, taxpayers do not avail the facilities of tax rebate. They do not have the investment or donation to get the benefit of tax rebate.
Today from this article, you will know how you can save tax 50% by investing or donating in certain areas as mentioned in the tax law which will be considered as investment allowance. Investment allowance is most important for the tax rebate.
Guess, you have heard about tax rebate. The tax rebate significantly reduces the tax burden of taxpayers but to get this benefit you have to invest or donate a certain amount which is known as investment allowance.
Taxpayers can demand maximum 25% of his taxable income as investment allowance which will be considered as tax rebate calculation. For your easily understanding, we may use an example to calculate the investment allowance and tax rebate step by step to show you how you can save tax by 50%.
Assume a taxpayer’s taxable income is BDT 1,000,000 during the income year. You have to start with the amount of taxable income. So, first you have to know how to find out the taxable income from your total income during the year. If you are a salaried person then all of the income from the salaries are not taxable income. There is ceiling of exemptions as per tax rules which will be deducted from your total income. And finally, after considering the exemptions, you will get your taxable income on which you have to pay tax using slab-wise tax rates.
If we calculate tax liability using the slab-wise tax rates considering the male individual taxpayers then the tax liability will be BDT 80,000. Here, we have skipped the total tax liability calculation process because in this article our main focus is to discuss with you how you can save tax by 50% and also to limiting the size of this article. So, we have got tax liability and now we will discuss how you can reduce your tax burden.
As the taxpayer’s taxable income is BDT 1,000,000 so he could claim maximum 25% on this amount which is BDT 250,000 as investment allowance. Now you have to invest or donate your money in the particulars areas as mentioned in the tax law.
Here, we have also noticed during the tax return preparation of individual taxpayers that most of the cases the taxpayers have the investment or donation but not in the areas mentioned as per tax law. Therefore, the taxpayers could not get the full benefit or sometimes no tax rebate benefit during the assessment year. And this increases the tax liability.
Another limitation we have noticed, the actual investment or donation is below the ceiling of maximum investment allowance. As we discussed, the maximum investment allowance is BDT 250,000 but most of the cases the actual investment amount is below this figure which may be BDT 200,000 or so on. Due to this, the full tax rebate facility could not enjoy by the individual taxpayers.
The smartest work will be to estimate your taxable income at the beginning of the income year and set a plan where you will invest or donate your amount to get the full tax rebate benefit. Do not stuck with the maximum ceiling of the investment allowance as discussed above which is BDT 250,000.
Try to invest or donate more than BDT 250,000 because it will help you in both ways. One, you have ensured your full tax rebate benefit and another is more investment will secure your retirement life. So, try to keep your investment allowance more than ceiling as you require.
Next, we will calculate tax rebate on investment allowance which we have get BDT 250,000. You have to apply rates to calculate the tax rebate amount which will be deducted from your tax liability. As per Finance Act 2020, there are two rates to calculate tax rebate based on the amount of taxable income of the taxpayers.
If the taxable income of any taxpayer is upto BDT 1,500,000 then the tax rebate shall be calculated at 15% on investment allowance. But if the taxable income exceeds BDT 1,500,000 then the tax rebate shall be calculated applying 10% on investment allowance. So, we understand that the individual taxpayers who have more taxable income will get less tax rebate benefit.
Now we can calculate tax rebate by applying the rate at 15% because as per our example in the above the taxpayer’s taxable income is below BDT 1,500,000. So, his tax rebate on investment allowance BDT 250,000 at 15% will be BDT 37,500!
Your tax liability is BDT 80,000 as discussed above and you have got tax rebate 37,500 which will be deducted from tax liability. And now your net tax liability is BDT 42,500!
Almost 50% of tax burden save legally!
Now apply in your own tax return!