Why are we obsessed with saving taxes?

A common type of comment that I’ve seen over the years starts with describing a situation like planning for retirement, children’s eduction, wedding etc. and ends with asking about ways to save tax.

What is this obsession with saving taxes?

For a lot of people, specially if you are starting out and don’t have a lot of tax liability or savings, it may just be better to pay off your taxes instead of lock the money in an instrument that you can’t access for very long.

For a lot of other people who are earning so much that the 1 lakh 80C deduction doesn’t cover all of their tax liability, once you are done with it then what? Why fixate on other instruments that save tax? Why not broaden your search to include everything?

I don’t know when (if at all) Direct Tax Code will be implemented but I’m fairly certain that if you compared the first draft of DTC with whatever is going to get implemented it will be a lot different in terms of simplicity.

DTC was meant to bring in simplicity because all these weird clauses about perquisites and transportation allowance and tax saving schemes were just so hard to decipher and were creating perverse incentives so they removed all of those initially, and lowered the tax rate. But then they gradually increased the tax rates in each draft so now you may have a situation where the tax savings are gone but the rates are pretty much the same.

The reason I bring up DTC is because the environment has a lot to contribute to this mentality of not looking beyond saving taxes as the government comes up with something new that saves tax every year or two and that in turn creates an anticipation that something else is on the horizon that will aid in saving taxes, and then it permeates through other investing thought process as well.

I think a lot of people need to be reminded that saving tax is not an end in itself, maximizing returns is the end, and saving tax may assist in that, but all your energy shouldn’t be focused on it.


18 thoughts on “Why are we obsessed with saving taxes?”

  1. GE racks up billions in profits globally and finds it profitable to employ an army of people (including ex-IRS officials) to bring down its tax liability to zero. Individuals need to mimic this at their own level and blogs such as this one are supposed to help us give ideas (in lieu of the army that individuals cannot employ — individually or collectively).

  2. Well said. In order to save few bucks of tax people end up paying substantial amount in uneccesary instruments.

  3. The article highlights a very important point that tax saving is just one of the benefits of investments. An investment strategy should not be solely done for saving or reducing tax. There are a number of features such as length/term of investment, returns (after tax), quality of the product, purpose of the product, etc which have to be considered. If a product meets someone’s need or objective and tax saving is an added advantage one should take it, else if the products sole motive is to save tax it may not be advisable, because tax laws can change or the product features may be unsuitable.

    I’ve seen articles talking about the advantages of PPF, NHAI bonds, etc. ……I’m not sure how many people are really keen on investing for such long terms with poor returns. In these cases the sole motive is to save tax.

    Like Manshu said in some cases paying tax which could be a few thousands or tens of thousands could be a better deal. There are people who donate to save tax, but only get a deduction of half that amount …..and assuming the individual’s tax slab is 30% effectively you are saving only 15% tax. And these products force you to lock up money for 3 years, 5 years, etc., which can dramatically affect people in the middle class.

    Taxes are unavoidable so the focus should be on reducing it to an extent and pay the tax instead of buying wrong products which ruin your finances. I think people should be fine if they pay around 10-15% of their annual salary as tax. Assuming you are earning Rs.6 lakhs p.a. you should be prepared to shell out Rs.60 k for tax. However, if you want to reduce the tax you can smartly choose certain investments (not very long term) or a housing loan, which can help you minimize the tax as well as help you achieve some goals.

  4. I think you are spot on with this article. Here in the US, there are people who do most of their “savings” in retirement accounts because of the tax benefit. Of course, this simply defers the tax it doesn’t eliminate it. The strings attached are not insignificant.

    Also, if you do invest in taxable accounts, by its nature it already has favorable tax treatment anyway.

  5. As they say common sense is not that common and when I see everyone around me trying to save tax I also join the bandwagon of saving tax. There are people whose PF’s exhaust 80C and still try to save tax Only those who pause and think why they are doing it realize the futility of meaningless saving tax. Lack of financial awareness plays a big hand. Onemint makes us aware of such issues. Keep up the good work Manshu!

  6. Rather than saving absolute taxe, the approach should be to maximise your post tax returns. So one must consider post tax returns., with this approach saving and investing in tax free instruments like PPF for long term is actually important

  7. Manshu, you are making perfect sense with this post. The thing is that most of us salaried people are just hard-wired into the “save tax, save tax” mode. It’s often more of a peer pressure thing rather than an actual money saving thing.

    If it wasn’t about money, the things people do to try and save tax at the end of the declaration deadline each year would be quite comical. And we end up playing right into the hands of the financial institutions and brokers who sell us “tax saving” products every year, to their benefit and our actual loss. Somehow, I doubt that the people who really “save tax” 🙂 each year, i.e businesses and business owners, are doing it by “investing” in such “tax savers”! 🙂

    There’s no doubt that many of us feel cheated when we pay tax and get hardly any public facilities in return, but the fact is also that somehow or the other, you will end up paying tax if you are a salaried person. It’s inevitable. So better focus on, as you say, maximizing returns and understanding the markets and financial products that are available to us, rather than only worrying about how to save tax each year.

  8. Hi Manshu

    You’ve raised some very important points wrt the mentality of the taxpayer wrt taxes. Most of the times we make thinking it will help us save taxes in future but with the proposed implementation of DTC, most of things may change.

    DTC is still in formation phase, so you never know which exemption will remain and which exemption will be washed out.

    So it is very important to value an Investment by its Risk and Return and not only by the Tax it may save in future

  9. I think in some way, people feel good when they avoid taxes. Behavioural Economists may better explain this. People might be feeling as if they have gamed the system It could also be intellectual snobbery. It is like if you know a loophole of the law and you exploit it and that gives you a high.

    Secondly, I think if tax collections and what the money is used for is made more transparent, people would be more willing to pay taxes. Right now there is a feeling that it is going into a bottomless pit of scams and more scams.
    For e.g if the government increases prices of diesel by Rs 2.00 in Bangalore tomorrow, but also says that the Rs 2.00 would go only for Bangalore Metro construction, you will not have much protests. Of course, the government should follow it up by monthly reports on how much was collected and how it was spent for Metro construction.

  10. The idea is that in some situations it makes sense to pay taxes instead of locking money in tax savin instruments & that tax planning is one part of financial planning is just one aspect of financial planning.

    Based on the angry emails since morning (more than any ever I think) I did a terrible job at making the point.

    1. u got hate emails… oh man u r popular 🙂
      strong points bring out strong emotions.. but i don’t think u did a bad job.. infact i think u have hit some chord that so many people wanna talk abt it.

      1. haha, but it is quite common actually….I get a lot of angry emails and comments, especially on insurance posts. I do a better job of handling those now than I did when I started but some of them still work me up quite a bit.

        Also, I see the sentences in my previous comment are terrible, must stay away from commenting while on phone.

  11. I think people would have liked paying tax if we didn’t have so many scams happening and we see a direct result in vicinity due to the tax paid.
    Like for example if Canada taxes are high the direct benefit is all medical expenses are taken care by the govt so you know what you are paying for.
    Same way US my tax is higher if I live in a school district where schools are noteworthy.And I also know what I pay as county tax goes only to my county and I can question my local Councillor for same.
    But where is the accountability here? For votes anything is doled out as it pleases the ruler.

  12. I completely agree with bemoneyaware. If optional, I would also never pay any tax. And please don’t take it as an unpatroitic comment.

    Plus, in my opinion tax savings are forced savings. If govt will not allow these savings to save tax, i know so many people, we might not save even iota of our salary. Anyhow, thats a different point altogether and i think you should do a post on that. I was thinking few days back will young India save their PF if that is made optional, even after company match. I don’t have an answer but I am sure your readers will generate good debate, something I love about OneMint.

    India is a high tax country. I am not comparing to any other conutry, this is IMHO. Look at salary tax + all other taxes. Look at tax you have to pay to eat at restaurant, to watch movie, to use airport. If you want to live below a threshold, a lifestyle of 80s, u won’t be paying taxes. But if you want to improve your lifestyle even slightly, you are paying huge chunk as TAX, as consumption TAX i.e.

    Also, if I earn 100 Rs and lets say pay 20 Rs as tax, I get 80 Rs. Now from that 80 I live a moderate life to save say 20 Rs. I am struggling to save 25% of my take home pay where actually I am only saving 20% of my pay (20 of Rs 100, remember?).

    On the other hand if I try to reduce my TAX of 20 Rs to lets say 15 Rs, that is 5% real saving.
    Thats my take.

  13. Very good question raised. Isn’t A penny saved is a penny earned ?

    All said and done we don’t like to pay taxes. If government would make paying tax optional no one would pay any tax, all that words of building your country put aside. Personally I wouldn’t.
    As we don’t like to pay tax, we look to ways to lessen it. With due regards to income tax department they have given options like 80C, 80D(medical insurance), 80G (charity), Section 24 (home loan) to make meaningful long term investments and save taxes . And no harm in saving taxes when it encourages – I personally invest in PPF to save and claim 80C. I get medical insurance and save tax too.

    But people are usually so focused on the short term that they ignore the big picture – ex invest in endowment plan of insurance. DTC as you mentioned was meant to bring in simplicity but we don’t know when and in what form will it be passed.

    When I mentioned the topic to my father in law he talked about other inevitable thing death. “In this world, nothing can be said to be certain, except death and taxes.” –Benjamin Franklin Just like taxes we all spend our lives in securing our place in heaven though none of us want to die 🙂
    In one finds the topic taxing one can read jokes and quotes about tax at Taxing times in a lighter vein

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