“Please don’t execute any transactions if they lead to taxes.”
One of our clients recently told this to a member of our execution desk. I was surprised.
On checking further, we realized that the client was in a higher tax bracket and taxation had become a major pain point. Anything that resulted in a tax outgo was therefore a strict “no-no”.
But is every tax bad?
I believe there are good taxes, bad taxes and taxes that are somewhere in between.
Taxes arising from business profits or professional income can actually be considered good taxes. The only way to substantially reduce such taxes is to earn less — ask your customers to pay you less if you are a business owner, or ask your employer to reduce your salary if you are a professional!
Sounds funny, but higher taxes on professional or business income generally mean that you are doing well.
As Jesus said, “Give to Caesar what belongs to Caesar, and to God what belongs to God.”
The concern arises when, after earning income, we unnecessarily park our money in tax-inefficient products and end up paying more tax than necessary. These are taxes that could potentially have been reduced through better financial planning and appropriate investment choices. These are categorized as bad taxes.
Let me give you a simple example.
Suppose you have ₹10 lakh to invest for the short term and you are in a 30% tax bracket.
If you keep it in a savings account earning 2.5% p.a.:
- Interest earned annually = ₹25,000
- Tax @ 30% = ₹7,500
- Post-tax income = ₹17,500
Now suppose a suitable liquid mutual fund earns 6%**:
- Annual Gain = ₹60,000**
- Tax at 30% = ₹18,000
- Post-tax gain = ₹42,000**
The savings account results in lower taxation — but also substantially lower earnings.
Therefore, don't look at taxation in isolation. Look at post-tax returns.
The objective of financial planning should not be to pay the least amount of tax at any cost.
Remember, taxation is generally levied on your income or gains, not on your original capital, subject of course to the specific tax rules applicable to the investment.
So, take a look at your income-tax return.
Don't lose sleep over the tax you pay on genuine professional or business income, assuming you have used the legitimate tax-saving opportunities available to you.
But do examine the taxes arising from your investments.
Minimize taxes wherever reasonably possible — but don't sacrifice a good financial decision merely to avoid paying tax.
Taxation should be one of the considerations in financial planning, not the objective of financial planning.
The sooner we understand this, the better our personal financial decisions can become.
At Naveen Rego Capital, a fee-only wealth advisory firm and a corporate SEBI Registered Investment Adviser, we evaluate the tax efficiency of financial strategies before making recommendations. However, our focus is not on minimizing tax at any cost.
Our focus is on better post-tax outcomes for our clients.
- *Actual returns and taxation of mutual fund investments depend on the nature of the fund, holding period and prevailing tax rules. The illustration is only for conceptual understanding and not a recommendation.
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Happy Financial Planning!
Naveen Julian Rego – CFP®
MD & Principal Officer
Naveen Rego Capital
SEBI Registered Investment Adviser
Reg No: INA000019211
BSE Membership ID: 2178
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