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Why the Rich Pay Lower Taxes Than You Think? Research Team | Posted On Friday, November 08,2019, 05:10 PM

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Why the Rich Pay Lower Taxes Than You Think?



There’s a famous saying, A rupee saved is a rupee earned. Why pay an extra rupee in taxes when you can save it with sound tax planning? This is what the rich do and pay lower taxes than you think.

The Government has offered several tax exemptions and tax deductions for you to save tax. You have the Section 80 deductions called Chapter V1A deductions. (These are from Section 80C to Section 80U). You have Section 24 tax deduction where you can save tax when repaying home loan interest. Let’s take a look at how sound tax planning helps the rich get rich and stay rich.

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Why the Rich Pay Lower Taxes Than You Think?​

ELSS Helps The Rich Save Tax

Equity-linked savings scheme or ELSS a type of mutual fund helps save tax. You enjoy the Section 80C tax benefit up to Rs 1.5 Lakhs a year on investing in ELSS.

If you fall in the highest tax bracket, (This is the 30% tax bracket), then ELSS is a great investment. It has a lock-in of just 3 years. ELSS invests most of your money in stocks. This means higher returns if you stay invested for the long term. Do remember that mutual fund investments are subject to risk. Read the offer documents carefully before investing.

Let’s say you earn Rs 11 Lakh a year. You fall in the 30% tax bracket. You can save up to Rs 46,800 in taxes. How does this work? Well, you invest Rs 1,50,000 a year in an ELSS scheme. You save 30% tax on Rs 1,50,000 which translates to Rs 45,000 a year. After accounting for a 4% less, you save a total of Rs 46,800 a year in tax. This is one of the ways the rich save tax.

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Charitable Donations

Giving money to charity through NGOs is the way for the rich to pay back to society. There are certain charitable donations which enjoy a 100% tax deduction. Some other charitable institutions enjoy a 50% tax deduction. The rich donate well to these charitable organizations and save tax.

They Seek Professional Help

The rich are not afraid to seek the help of chartered accountants, tax consultants and financial advisors to save taxes. The rich understand it’s foolish to think they know it all and pay their money in tax. A financial advisor not only helps save tax, but he also helps the rich squeeze more out of every rupee.

See Also: A Five-Minute Guide to the Systematic Investment Plan

The Rich Fear Inheritance Tax

The inheritance tax in India was abolished way back in 1985. Still, the rich in India fear it could make a comeback at any time. They want to protect their assets as their children inherit them. Inheritance tax is a tax levied on assets that include properties that are transferred to legal heirs. These heirs would have to pay taxes when they inherit the property.

This is where a Trust helps the rich save tax. After the Trust is set up, all properties of an individual are transferred to the Trust. (This is a revocable or irrevocable Trust). These Trusts are administered by Trustees and a list of beneficiaries is drawn up.

See Also: Why Women Need to do Financial Planning?

Inheritance Tax (If and when it is reintroduced in India), can be avoided with the Irrevocable Trust. Properties that have been transferred to the Trust, cannot be transferred back. Many of the HNIs, the rich corporate businessmen and even film stars or cricketers use Trusts to transfer wealth to their children. This protects assets from the taxman.

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