How much should we invest for tax purposes

Introduction - How much should we invest for tax purposes

How much should we invest for tax purposes – As a salaried individual, it’s necessary to allocate a portion of your income towards eligible investments to qualify for tax rebates. Determining the optimal amount of investment for maximizing tax rebates can be a complex task. This blog post will delve into the process in detail.

What is investment tax rebate ?

Investment tax rebate is a mechanism to reduce your tax liability by making investments in designated sectors. A clear grasp of the concept of investment allowance is indispensable for individual taxpayers, as it holds a pivotal role in shaping their tax obligations. It’s important to note that not all investment choices are eligible for claiming an investment tax rebate under the Income Tax Act 2023. Therefore, for tax planning, it’s essential to carefully consider where to invest and the appropriate investment amount.

How investment tax rebate works ?

An individual taxpayer’s tax liability is determined by their taxable income, which takes into account any investment tax rebate. Tax rebates offer taxpayers a way to alleviate their tax burden. To qualify for an investment tax rebate, taxpayers are required to make investments or contributions in designated areas outlined by income tax laws. When these investments or donations align with the stipulations of tax laws, they are classified as part of the investment allowance. This permits individual taxpayers to take advantage of tax rebate facilities, which are then deducted from their overall tax liability. This deduction is commonly referred to as the Investment Tax Rebate.

How much to invest ?

How much should we invest for tax purposes? How much of our income should be allocated to investments for tax purposes? Calculating the specific amount for tax investment can be a complex process. Unlike the Income Tax Ordinance 1984, the current Income Tax Act 2023 does not specify the exact sum one should invest in order to claim investment tax rebate. This raises the question of how to determine the appropriate amount for tax investment. To find the answer, let’s dig into the investment tax rebate section of Income Tax Act 2023.

The Investment Tax Rebate is outlined in Section 78 of the Income Tax Act of 2023. According to this section, the Investment Tax Rebate will be the lesser of the following three amounts:

i) 3% of ‘A‘

ii) 15% of ‘B‘

iii) Tk. 10 Lacs

Where A is Total taxable income excluding:-

(1) tax-exempted income;

(2) Reduced rate applicable income; and

(3) Income on which minimum tax is applicable;

Where B is Total investment and expenditure as per Part 3 of 6th Schedule of ITA 2023.

By referencing Section 78 of the Income Tax Act of 2023, it becomes apparent that a taxpayer’s tax rebate will be the most lowest figure among the three mentioned earlier. In practical terms, this means that you can secure a maximum investment tax rebate of 3% of your total income. To ascertain the required investment amount, you have to do back calculation based on this maximum rebate amount.

So, to determine the amount of investment we have to follow the below two steps.

Step 1: Calculate the maximum tax rebate amount based on the criteria outlined in serial (i) above, without considering actual investment.

To begin, it’s essential to determine the maximum tax rebate amount that an individual can claim in accordance with Section 78 of the Income Tax Act of 2023. In this analysis, we’ll ignore the investment amount and focus solely on understanding the tax rebate under the first category mentioned (serial (i) above) and then consider the investment rate. Now, let’s dig into three illustrative examples:

Step 2: Back calculation of maximum tax rebate amount so determined

In this step, we will ascertain the requisite investment by dividing the amount derived in step 1 by 15%. The reason for this division is that the prevailing rate for the investment amount is 15%, in accordance with Section 78 of the Income Tax Act of 2023.

Illustrative examples

Question 1

Particulars of income		Amount
Taxable Income from Employment		500,000
Interest Income (Bank interest, FDR interest, DPS interest)		75,000
Interest income of Bangladesh Shanchaypatra		35,000
Total Taxable income		610,000

Solution - Step 1

Solution - Step 2

Question 2

Particulars of income		Amount
Taxable Income from Employment		780,000
Interest Income (Bank interest, FDR interest, DPS interest)		50,000
Interest income of Bangladesh Shanchaypatra		22,500
Total Taxable income		852,500

Solution - Step 1

Solution - Step 2

Question 3

Particulars of income		Amount
Taxable Income from Employment (of a professor)		780,000
Taxable Income from Other sources (tuition etc.)		450,000
Taxable Income from Rent (rented to a family)		380,000
Interest Income (Bank interest, FDR interest, DPS interest)		50,000
Interest income of Bangladesh Shanchaypatra		122,500
Total Taxable income		1,782,500

Solution - Step 1

Solution - Step 2

Where to invest ?

For information on the investment options eligible for an investment tax rebate, please refer to the blog post below.

Allowable investment options for tax purposes in Bangladesh

Conclusion - How much should we invest for tax purposes

This method allows you to calculate how much should we invest for tax purposes and tax rebate amount. We trust that it is now clear to you. Should any uncertainties persist, please feel free to ask for clarification or leave a comment.