Paying Tax May Be Better Than Saving Tax

[Query]

I purchased a flat in Coimbatore in May-2015 for Rs 35 Lakh and sold it in this month for Rs 77 Lakh. My query is how to treat this Capital gain.

1.Is it advisable to pay the tax @12.5% and invest the balance left out amount available?

2.Is it advisable to avail the indexation benefit and pay tax @ 20%?

3.Is it beneficial to invest the capital gain of Rs. 42 Lakh in Infrastructure bond with Interest @5.25% and 5 years lock in period and invest the balance with higher interest rates?

As I am a senior citizen and not interested in buying another house, I need your advice on this. I am a retired bank employee and get 1% extra interest in all my deposits [Hariraj Iyer – nharirajiyer@gmail.com]

Opinion:

In India, earning money gives happiness-but saving tax gives a different level of emotional satisfaction altogether. With my past experience, I can say that a small tax saving for majority of the taxpayers feels almost like winning a World Cup final.

At the retirement stage, liquidity, simplicity and regular income often become more important than aggressive tax-saving products. Let us first understand your tax position and then evaluate each of the three issues mentioned by you in the query.

 

1.Basic Computation of Capital Gain:

1.You have purchased the flat in the FY 2015-16 for ₹ 35 Lakh & sold it in the FY 2026-27 for ₹ 77 Lakh. Since the property is held for more than 24 months, it qualifies as a Long-Term Capital Assets. In your case, the stamp duty valuation of the property is not given and assuming that it is not exceeding Rs. 77 Lakh, the present opinion is framed.

2.Now, the critical decision is- which taxation route to choose – 12.5% without indexation or 20% with indexation?
Taxpayers must note that the income tax law doesn’t give taxpayers an option to choose between 12.50% or 20%. The law simply says that if the tax liability @12.50% without indexation exceeds the amount of tax @20% with indexation then the tax liability would be reduced by such excess amount. Let us work out the tax liability in your case without planning for any tax exemption.

2.(a)  Tax Rate of 12.5% Tax Without Indexation:
Your capital gain without indexation would be Rs. ₹42 Lakh (ignoring stamp duty, registration expenses, brokerage, etc., for want of information and for the sake of simplicity). The basic tax liability @12.50% on Rs. 42 Lakh would be Rs. 5.25 Lakh.

(b)   Tax Rate of 20% Tax with Indexation:
The Cost Inflation Index (CII) for the FY 2015-16 is 254 whereas the same for the FY 2026-27 has not yet been notified. However, for the sake of calculation, it is taken at 390 (CII for the FY 2025-26 is 376). With this, the indexed cost of acquisition would be around Rs. 53.74 Lakh and the resultant LTCG would be Rs. 23.26 Lakh. The basic tax liability @20% on Rs. 23.26 Lakh would be Rs. 4.652 Lakhs.

(c)   If you don’t want to buy another house property or invests in specified capital gain bonds for claiming an exemption, then the LTCG tax liability in your case shall be Rs. 4.652 Lakh.

1.Saving Tax by investing in 54EC Bonds:

You can avoid the LTCG tax liability by investing the capital gain amount in specified 54EC bonds issued by REC/PFC/IRFC. Interest on 54EC bonds is fully taxable under “Income from Other Sources”.

4.Should You Save Tax or Earn More?

Now comes the real million-rupee question: Is tax saving always wealth creation? The answer lies in simple mathematics. Let us pull out a calculator, ignore sentiment & see what would be the value of Rs. 1 Lakh after 5 years under both the option – Paying Tax Vs. Saving Tax. In simple words, the comparison boils down to this – Lower tax with lock-in and lower return Vs. Slightly higher tax with better flexibility and potentially higher return.

Option 1:

If you invest an amount of Rs. 1 Lakh in 54EC Bonds, after 5 years, the amount would become Rs. 1,29,155/- as under:

Particulars	Interest	Year end
		Value
1st Year	5,250	105250
2nd Year	5,526	110776
3rd Year	5,816	116591
4th Year	6,121	122712
5th Year	6,442	129155
Total Funds	29,155	129,155

 

Above calculation is based on an assumption that
(a) the amount you receive from 54EC bonds annually is reinvested back at the same interest rate of 5.25% elsewhere.
(b) Investor income is not exceeding Rs. 12 Lakh and so there is no income tax liability as such, in view of tax rebate available under the New Tax Regime (NTR). Many taxpayers treat tax-saving products like festival discounts—buy first, calculate usefulness later.

Option 2:
Now, let us assume that you opt to pay the LTCG tax of Rs. 13,000/- on LTCG of Rs. 1 Lakh (i.e. 12.50% basic rate of LTCG & 4% thereon for education and health cess of 4% thereon). Effectively, you would be left with an amount of Rs. 87,000/- for investment in the bank FDR or elsewhere. If invested @ 8.26% compounded annually, the amount would be Rs. 1,29,159/-. Here also it is assumed that the annual interest is reinvested at the same rate without any tax liability. The value of Rs. 87,000/- after 5 years at different rate of returns shall be as under:

Rate of Return	8.00%	8.26%	9.00%	10.00%
1st Year Interest	6,960	7,186	7,830	8,700
2nd Year Interest	7,517	7,761	8,456	9,396
3rd Year Interest	8,118	8,382	9,133	10,148
4th Year Interest	8,768	9,053	9,864	10,959
5th Year Interest	9,469	9,777	10,653	11,836
Total Return in 5 years	40,832	42,159	45,935	51,039
Value after 5 years	127,832	129,159	132,935	138,039

5. In short, if you are able to get interest on your investment of more than 8.26%, you can safely conclude that “Paying tax is better than saving Tax”. Many taxpayers proudly save tax first and calculate returns later. After all, what’s the point of saving tax if your investment gives you both a lower return AND a 5-year headache? Sometimes, the taxman takes a little –

 

and leaves you richer

Conclusion:

The comparison may vary depending upon tax slab, reinvestment return, inflation, and future interest rates. For decades, Indian taxpayers were trained to believe that ‘saving tax’ is always smart.
But under the new capital gain regime, the smarter question is: ‘What remains in your pocket after five years?’ Sometimes, paying a reasonable amount of tax and keeping your money flexible can generate better wealth, better liquidity and better sleep. In many cases, paying tax and investing freely may prove wiser than locking funds merely for tax saving.

[Views expressed are the personal view of the author. Readers are advised to seek professional advice before taking any decisions. Readers may forward their feedback & queries at nareshjakhotia@gmail.com.  Other articles & response to queries are available at www.theTAXtalk.com]