Tax Optimizer: How Mr. Ramesh, a retiree, reduced his tax liability

Written on Tuesday, January 9, 2018
By Mitali Sharma

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Tax saving is not about saving a few penny, rather its prime purpose is to encourage you to invest for your future's financial security. Through tax-efficient investing, you can ensure that you have sufficiently invested for your future and at the same time you get to save some money. Even while doing tax-efficient investing,  diversified investing is the key to successful investing.   


60 years old, Mr. Ramesh Kumar had retired as a librarian on 1st April 2017. He received total retirement benefits amounting to Rs.35.5 lacs, including Employee Provident Fund, Gratuity, Leave Encashment etc. Mr. Kumar is entitled to a lifelong monthly pension of Rs.30,000/-. Also, he has a Public Provident Fund account where the accumulated balance is Rs.8 Lacs. Besides, 15 years ago he bought a medical insurance covering himself and his wife. He is paying annual health insurance premium of Rs.20,000/. 

Out of these Rs.35.5 lacs, Mr. Ramesh had decided to keep Rs. 3.3 lacs in his Savings Bank a/c for family's day-to-day needs and as an emergency fund.  For his remaining retirement benefits of Rs.32.2 Lacs, he wanted some investment plans. Like many others, he was initially planning to make a fixed deposit out of his retirement benefit amount so that he gets the guarantee of security as well as a tax benefit. But for the second opinion, he consulted this investment relationship manager, who recommended him to make investments in diversified instruments. Accordingly, Mr. Kumar agreed to make the following investments for a diversified portfolio: 
Through this efficient tax-saving investment, Mr. Rakesh not just managed to make investments into diversified instruments but also managed to reduce his total tax liability by 43%. Let's us see how that happened?
Tax Liability of Mr. Ramesh 
Mr. Ramesh's investment portfolio includes instrements that offer a mix of taxable and tax-free returns. Let's us see what will be his total income for Financial Year April 2017 to 31st March 2018.


Through efficient tax-saving investment, Mr. Kumar's current taxable income is coming out to be Rs. 52,6450.  Had Mr. Rajesh chose to invest Rs.32.2 lacs in FD as per his original plan, then his taxable income would have been Rs. 5,98, 600. (illustration below)



So, by considering the recommendation of his RM, Mr. Kumar could reduce his taxable income by Rs. 72,150 and this will definitely reduce his tax liability as well. Let's see how much tax Mr. Ramesh has saved through this efficient tax saving investments. For this let's calculate the tax on Rs. 52,6450 (his current taxable income after with efficient tax saving) as well as on Rs. 5,98,600 (taxable income after investment in FD only).


Deductions applied: 




When it comes to investment, one basic rule is "Don't put all your eggs in one basket." The RM helped Mr. Kumar in developing a diversified investment portfolio and also facilitated a tax-efficient investing for him. Now Mr. Kumar's portfolio has a good mix of instruments that offer guaranteed returns as well as instruments like Mutual  Funds that have the potential of offering better returns in the long run. Along with this, Mr. Kumar succeeded in reducing his tax liability by 40%. Under his original plan, he had to pay Rs. 6107 as tax, but now he has to pay the tax of only Rs. 2392.  


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