WEALTH MAXIMIZATION

WITHTAX BENEFIT

SUBMITED BY:-

AMIT MALIKMBA (1ST SEMSTER)

OBJECTIVES OF WEALTH MAXIMIZATION:

investment can be defined as present sacrifice in anticipation of future benefit

investment decision making involves comparison of the expected future benefits with the costs of the investment

investors’ ultimate goal is to maximize their wealth by choosing investments that are worth more than they cost

the NPV decision rule employs the wealth maximization concept: If faced with two competing projects, one that offers an NPV of $1,501 and another that offers a NPV of $703, the investor would prefer the one with the largest NPV

Introduction:It is said that there are only 2 certainties in life:DEATH and TAXES.Both are inevitable. We meet both unwillingly. Unfortunately, the comparisonsends there. Death relieves the person from all earthy worries.Taxation, on the other hand, neither fully kills the person nor lets him/her livein peace.There is one more thing in favor of Death over Taxes – death does not get worseevery time the budget is presented by the FINANCE MINISTER! In the last 20 years, the Income Tax Act was amended more than three thousand times!For all his progressive views, Dr. Manmohan Singh could not helpintroducing 438 amendments within a period of two years.

Methods for Reducing TAX BURDEN:

There are three method by which you can reduce your tax burden:

TAX EVASION TAX AVOIDANCE TAX PLANNING

TAX EVASION:Some people reduce the tax burden by deliberately suppressing their income, or by inflating the expenditure and resorting to various types of accounting manipulation.Such underestimation of Income seems to be worldwide phenomenon.Tax-evaded money as a percentage of Gross National Product (GNP) is estimated to be 18% in India, 6% in USA, 2% in UK, 10% each in Denmark, Italy, Belgium and the former USSR.In Japan, it is reported that accounts of 2206 companies reviewed by the Income Tax Department revealed underestimation of income in all companies except one. Out of sheer desperation, the government of India has encouraging Tax Evaders, though indirectly, by announcing various schemes from time to time.Such schemes are as follow:

NATIONAL HOUSING BANK GOLD BONDS SCHEME VOLUNTARY DISCLOSURE OF INCOME SCHEME

ALL YOU HAD TO DO WAS TO DISCLOSE YOUR INCOME, PAY 30% TAX ON IT AND YOU GOT 100% PEACE OF MIND…

TAX AVOIDANCE: Some people save on taxes by exploiting the loopholes in the taxation

laws, until they get plugged by the legislature. When MAT was first introduced for taxing book profits, any companies took advantages of loopholes in the legislation and provided additional depreciation to avoid the minimum tax. However, subsequently, the loophole was suitable plugged through an amendment.

Similarly, under Section 80HHCof the Income Tax Act.

TAX PLANNING: There was a time when, Personal Income Tax was as high as 97.5%

and Wealth Tax was 12%. But now the taxation scenario has changed. People are more willing to pay taxes. They are ready to follow the

regulation as the tax rates have also gone down. The maximum Income Tax rate is 30% and Wealth Tax is 1%. By

appropriate tax planning, an individual can avail various rebates thereby reducing his/her tax liability.

You can reduce your tax liability by arranging your financial incomes and investments in such a way as to enjoy the maximum tax benefits by making use of all the beneficial provisions and tax incentive.

Which are incorporated in the tax incentives are investment oriented. Tax Planning is both perfectly legal and encouraged by tax

authorities.

A SIMPLE EXAMPLE OF TAX PLANNING:

Rahul Mehta has an income of Rs. 1,86,000. Mehta gets a salary of Rs. 12,000p.m.,long-term capital gains on account of shares ofRs. 20,000, and interest from bank deposits of Rs. 22,000Thus, Mehta’s Gross Income will be as under: Rs. Salary (Rs. 12,000 X 12 ) 1,44,000Interest on Bank Deposits 22,000 L.T. Capital Gain on Shares 20,000 Total Gross Salary 1,86,000

To reduce his Tax Liability, he contributes Rs. 55,000 toward PF, LIC policies, Mutual funds, etc. eligible for rebate under section 88.

His taxable income is shown in the table below. As shown in the table he needs to pay a tax of only Rs. 4,800 on Gross Income ofRs. 1,86,000.With Tax Planning, Rahul would had to pay a less Tax.

RS. RS.a.) Salary 1,44,000

Less: Standard Deduction u/s 16(i) (30,000) 1,14,000b.) Interest on Bank Deposits 22,000

Gross Total Income 1,36,000Less: Deduction u/s 80L (12,000)Net Income 1,24,000Tax on Rs. 1,24,000 13,800Less: Rebate u/s 88 @ 20% (11,000)Tax (A) 2,800

c.) Long Term Capital Gain 20,000Tax @ 10% (B) 2,000Total Tax (A) + (B) 4,800Surcharge NilTotal Tax Payable 4,800

Without such Tax Planning, Rahul would have had to pay much higher Tax…

On the other hand, if he would not have done Tax Planning he would have to pay a tax of

Rs. 15,800…

RS. RS.a.) Salary 1,44,000

Less: Standard Deduction u/s 16(i)

(30,000) 1,14,000

b.) Interest on Bank Deposits 22,000Gross Total Income 1,36,000Less: Deduction u/s 80L (12,000)Net Income 1,24,000Tax on Rs. 1,24,000 13,800Less: Rebate u/s 88 @ 20% (11,000)Tax (A) 2,800

c.) Long Term Capital Gain 20,000Tax @ 10% (B) 2,000Total Tax (A) + (B) 4,800Surcharge NilTotal Tax Payable 4,800

Rahul’s Total Saving With the help of Tax Planning:

Without Tax Planning (TAX PAID)

Rs. 15,800

With Tax Planning (TAX PAID) Rs. 4,800

TOTAL SAVING Rs. 11,000

INVESTMENT:Now Rahul can invest that amount in any types of INVESTMENT… And earn more and moreMONEY …

TYPES OF INVESTMENT: FIXED DEPOSITS

MUTUALS FUNDS

SHARES

ULIPs

FIXED DEPOSITS: When you want to Invest your hard earned money for a longer period of time and get a regular income income, then Fixed Deposit scheme is Ideal.

It is SAFE, LIQUID and FETCHES HIGH RETURN…

BENEFITS OF FIXED DEPOSIT:Interest paid either monthly or quarterly.

The yield or return on a Fixed Deposit is different from Interest.

Possible to take LOAN against Fixed Deposits.

Bank Fixed Deposit are exempt fromIncome Tax u/s 80L.

MUTUAL FUNDS:A Mutual Fund is a Pool of Money contributed by

Individual who have similar Financial Goal.

The money collected is then Invested in various SECURITIES such as:

EQUITY DEBENTURES/ BONDS MONEY MARKET INSTRUMENTS

Mutual Fund Operation Flow Chart:

TYPES OF MUTUAL FUNDS:

MAIN FUNCTION OF MUTUAL FUNDS:

Buying and Selling of SECURITIES on behalf of its unit holder

Enables the Small Investors to shares in large and diversified portfolio of Assets, which reduce the risk investment.

SHARES:

In Business and Finance, a SHARE (also referred to as Equity Share) of stock means a share of OWNERSHIP in a Corporation(Company)…

FEATURES OF SHARES: MATURITY

RIGHT TO INCOME

CLAIM ON ASSETS

RIGHT TO CONTROL

LIMITED LIABILITY

ULIPs:ULIPs are insurance plans which provide capital appreciation by investments in various schemes in debt and equity markets…

ULIPs typically provide investors the option to invest in: Liquid funds

Debt or bond funds

Balanced Funds

Equity Funds