How much should we invest for tax purposes – The investment tax rebate serves as a tool for reducing your tax burden through investments in specified sectors. Understanding the concept of investment allowance is crucial for individual taxpayers as it significantly influences their tax liabilities. It’s worth emphasizing that not all investment options qualify for claiming an investment tax rebate under the Income Tax Act 2023. Therefore, prudent tax planning is essential to make decision on where to invest and how much to invest.
What is investment tax rebate?
The investment tax rebate refers to the procedure of reducing the tax burden of a taxpayer by investing in authorized sectors as specified in the Income Tax Act 2023.
The tax liability of an individual taxpayer is determined on their taxable income, which considered any investment tax rebates. These rebates provide taxpayers a mechanism to reduce their tax obligations.
To be eligible for an investment tax rebate, taxpayers must invest or contribute in specified areas as determined under 6th Schedule of Income Tax Act 2023. When these investments or donations adhere to the provisions of tax laws, they are considered part of the investment allowance. Investment tax rebate enables individual taxpayers to lessen their total tax liability.
How much should we invest for tax purposes?
How much of your income should be invested for tax purpose? How much should we invest for tax purposes?
Determining the proportion of income to allocate for tax investments purposes can be a complex task. Unlike the Income Tax Ordinance of 1984, the current Income Tax Act 2023 does not specify a precise figure that one must invest to get an investment tax rebate.
This raises the question of how to ascertain the exact amount for tax investment. To address this query, let’s look into the investment tax rebate provisions outlined in the Income Tax Act 2023.
Provision of Section 78 of Income tax Act 2023
The Investment Tax Rebate is addressed in Section 78 of the Income Tax Act 2023. As per 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 tax exempted income, reduced rate applicable income and income on which minimum tax is applicable; and
“B” is Total investment and expenditure as per Part 3 of 6th Schedule of ITA 2023.
Referring to Section 78 of the Income Tax Act 2023, it is evident that a taxpayer’s tax rebate will be the smallest among the three figures previously mentioned. In practical terms, this implies that the maximum investment tax rebate that one can obtain is 3% of their total income.
To calculate the necessary investment amount, one must perform a reverse calculation based on this maximum rebate amount.
Therefore, to determine the investment amount, we need to follow the two steps below:
Step 1: Determine the maximum tax rebate amount without considering of actual investment under serial (i) of above
Firstly, it is crucial to establish the maximum tax rebate allowable for an individual as per Section 78 of the Income Tax Act 2023. In this process, we will ignore the investment amount and concentrate solely on the tax rebate under the category mentioned (serial (i) above) and subsequently consider the investment rate.
Step 2: Back calculation of maximum tax rebate amount so determined
In this stage, we will determine the necessary investment amount by dividing the figure obtained in step 1 by 15%. We are dividing by 15% because the current investment rate is 15%, as stipulated in Section 78 of the Income Tax Act 2023.
Illustrative Examples
Example 1
Say, below are the details of Mr. Rajesh Rahman for the year ended 30 June 2023.
| Particulars of income | Amount | |
| Taxable Income from Employment (Salary) | 550,000 | |
| Interest Income (Bank interest/ FDR interest/ DPS interest) | 45,000 | |
| Interest income of Bangladesh Shanchaypatra | 25,000 | |
| Total Taxable income | 620,000 | |
How much Mr. Rajesh Rahman should invest for tax purposes?
Soluation of Example 1
| Step 1 – Maximum investment rebate irrespective of investment | Amount | Amount |
| Total Taxable income | 620,000 | |
| Less: minimum tax applicable income | ||
| Interest Income (Bank interest/ FDR interest/ DPS interest) | 45,000 | |
| Interest income of Bangladesh Shanchaypatra | 25,000 | 70,000 |
| Amount eligible for tax rebate | 550,000 | |
| 3% of this | 16,500 |
| Step 2 – back calculation of maximum tax rebate amount so determined | ||
| Divided by 15% (Tk. 16,500 divided by 15%) | 110,000 | |
Example 2
Below are the details of income of Ms. Nahida Sultana for the year ended 30 June 2023
| Particulars of income | Amount | |
| Taxable Income from Employment (Salary) | 814,000 | |
| Interest Income (Bank interest/ FDR interest/ DPS interest) | 105,000 | |
| Interest income of Bangladesh Shanchaypatra | 24,550 | |
| Total Taxable income | 943,550 | |
How much Ms. Nahida Sultana should invest for tax purposes?
Soluation of Example 2
| Step 1 – Maximum investment rebate irrespective of investment | Amount | Amount |
| Total Taxable income | 943,550 | |
| Less: minimum tax applicable income | ||
| Interest Income (Bank interest/ FDR interest/ DPS interest) | 105,000 | |
| Interest income of Bangladesh Shanchaypatra | 24,550 | 129,550 |
| Amount eligible for tax rebate | 814,000 | |
| 3% of this | 24,420 |
| Step 2 – back calculation of maximum tax rebate amount so determined | ||
| Divided by 15% (Tk. 24,420 divided by 15%) | 162,800 | |
Example 3
Let’s consider the below information of Mr. Sakib karim for the year ended 30 June 2023.
| Particulars of income | Amount | |
| Taxable Income from Employment (of a professor) | 842,000 | |
| Taxable Income from Other sources (tuition etc.) | 635,000 | |
| Taxable Income from Rent (rented to a family) | 280,000 | |
| Interest Income (Bank interest, FDR interest, DPS interest) | 102,500 | |
| Interest income of Bangladesh Shanchaypatra | 112,500 | |
| Total Taxable income | 1,972,000 | |
Please calculate the amount that Mr. Sakib should invest for tax purposes.
Soluation of Example 3
| Step 1 – Maximum investment rebate irrespective of investment | Amount | Amount |
| Total Taxable income | 1,972,000 | |
| Less: minimum tax applicable income | ||
| Interest Income (Bank interest, FDR interest, DPS interest) | 102,500 | |
| Interest income of Bangladesh Shanchaypatra | 112,500 | 215,000 |
| Amount eligible for tax rebate | 1,757,000 | |
| 3% of this | 52,710 |
| Step 2 – back calculation of maximum tax rebate amount so determined | ||
| Divided by 15% (Tk. 52,710 divided by 15%) | 351,400 | |
Conclusion - How much should we invest for tax purposes
The method described above on How much should we invest for tax purposes will facilitate the calculation of the required investment for tax purposes and the resulting tax rebate amount. We trust that this process is now comprehensible to you. If any uncertainties remain, please do not hesitate to seek clarification or provide feedback.
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