To save income tax by reducing tax liability, Financial Experts advise you to buy a car or similar depreciating assets – Laptop, Mobile Phone etc.

But does it practically make sense to make huge expenses just to save on paying taxes?

Let’s understand it through an example of buying a car of Rs 10 Lakh.

If you buy a car of Rs.10 lakh, you can claim depreciation of that car worth 10 lakh rupees over a period of certain years, @ 15% per year on Written Down Value of Car,

The depreciation claim on the car will reduce your income by the depreciation amount, which is 15% of the claim.

Tax liability on the above said depreciation amount will be in the range of 25% to 30% depending upon your firm’s income tax slab.

Thus the total income tax benefit which you will get will be around 25% to 30% of the total,

Means in our example case we can get tax benefit up to 2.5 lakhs to 3 lakhs.

For the next 20 years of buying that car, the below table highlights how the amount and tax liability benefit would play out.

Year	Written Down Value of Car	Depreciation	Benefit @ 30%
1st Year	10,00,000	1,50,000	45,000
2nd Year	8,50,000	1,27,500	38,250
3rd Year	7,22,500	1,08,375	32,512
4th Year	6,14,125	92,118	27,635
5th Year	5,22,007	78,301	23,490
6th Year	4,43,705	66,556	19,967
7th Year	3,77,150	56,572	16,972
8th Year	3,20,577	48,087	14,426
9th Year	2,72,491	40,874	12,262
10th Year	2,31,617	34,743	10,423
11th Year	1,96,874	29,531	8,859
12th Year	1,67,343	25,101	7,530
13th Year	1,42,242	21,336	6,401
14th Year	1,20,905	18,136	5,441
15th Year	1,02,770	15,415	4,625
16th Year	87,354	13,103	3,931
17th Year	74,251	11,138	3,341
18th Year	63,113	9,467	2,840
19th Year	53,646	8,047	2,414
20th Year	45,599	6,840	2,052
		Total Benefit	2,88,372

As highlighted in the above table, over 20 years we get a tax benefit of Rs 2.88 Lakh, by having an expense of 10 Lakh rs upfront.

Buying a depreciating asset for claiming depreciation is an absurd decision.

It is also a loss-making decision, as eventually, we will be better placed if we pay the tax upfront instead of buying just for depreciation and invest the remaining after-tax amount in appreciating assets like stocks and other investments

We pay income tax when we have an “Income”, we should duly optimise for saving the payable tax. But in doing so, we should not hamper our savings in ways where, just to not pay some amount of income tax, we’re destroying the future purchase power of our current income by not saving and investing it.

What will you gain by investing the amount remaining after paying taxes?

A social, ethical and business dilemma of every person who earns money.

India is a cash-driven country. The recent advances in the internet and fintech have shifted the momentum to Digital payments, but cash still plays a major role in the overall economy.

We sometimes get opportunities to avoid taxes by taking our revenue or income in cash from our customers or buyer.

What do we save?

30% of the amount, if we are in the top tax bracket.
10% to 20% if we are in a lower tax bracket.

Let’s consider we did take the amount in cash to save taxes.

Now we face another problem, where to keep cash?

There are generally 3 options that people use to store cash

• Buy Gold
• Buy Real Estate
• Spend the cash

If we spend that cash, 100% of it is gone.

If we buy Gold or Real Estate we will need to safe keep them. Usually, both these investment options over the long term give returns of 10% PA.

What if we pay the 30% tax and Invest 70% in the share market

You will get long term average returns of 20%, or by availing advisory services, we compound it at 30% in the share market. Which you can benefit from.

What’s the big deal in 10% in cash, 20/30% in equity?

If you see the above chart
The Real Estate and Gold got compounded at 10% from an initial start of rs100. After 20 years the rs100 has turned into rs612.

Investment in the stock market was started from Rs70 as we have paid 30% tax on it. After 20 years of return calculated at 20%, it has turned into rs2236. If considered at 30% it has turned into rs10233.

Even with a head start of 30% the investments in gold and real estate seem to fall far behind over the long term.

Icing on the cake

Profit from the Share Market also has a Discount of 50% Tax on Short Term Capital Gain (Profit made within 1 year time), which is taxed at 15% and not 30%.
Discount of 70% Tax on Long Term Capital Gain (Profit made beyond 1 year time), which is taxed at 10% and not 30%.

Let us know what you think in the comments. If you think this might help someone in your circles, share it wholeheartedly.

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