How to maximise tax rebates through planned investments

The government offers a generous tax rebate against people's savings, investments, and donations to some recognised sectors, and one can significantly reduce their income tax liability through them, according to experts.

Chartered accountant Snehasish Barua, a partner at Snehasish Mahmud and Company, recently told The Business Standard that an individual can claim a 15% tax rebate on up to 20% of annual taxable income, or Tk1 crore, which can reduce the annual tax liability of a high net worth individual (HNWI) by Tk15 lakh, while most of the emerging middle-income taxpayers can limit their yearly income tax to the minimum amount of Tk5,000.

For the rebates, one needs to show proof of their recognised savings, investments, or donations at the fiscal year end, and most people tend to rush to pour some money into the instruments at the eleventh hour in June every year, creating pressure on themselves to accumulate a big sum to invest at once, while many even fail to do so.

"Better plan it at the beginning of the fiscal year and continue it," he advised. 

For small savers, a monthly deposit in the scheduled banks' deposit pension scheme (DPS), investments in national savings certificates (NSC), payments of life insurance premiums, and contributions to provident funds are enough to maximize their tax rebate.

Since the ceiling for claiming tax rebate against DPS is only Tk60,000 a year, one cannot buy NSC worth more than Tk50 lakh, and the life insurance and provident fund have their practical limits, HNWI taxpayers need to invest in capital market instruments to maximise their tax rebate.

However, capital market returns are not certain and fixed like those from savings instruments, and due to the risk of capital erosion, many avert stocks.

On the other hand, Treasury bonds and mutual funds that are less risky than stocks are yet to be popular here in Bangladesh, despite offering a limitless investment opportunity that can help maximize tax rebate, said Barua, adding that the publicly traded securities also do not have any mandatory holding period for tax rebate, while NSC and DPS have to be held for a certain period of time.

Ahmed Abdullah-Al-Tamjeed, chief marketing officer at the top-tier asset manager IDLC Asset Management Ltd, said those who learned how to invest in stocks and treasury bonds and need capital market investments for tax rebates can try the instruments themselves.

However, asset management firms like his have solved the problem for those who are yet to learn investing and should invest through mutual funds, as the professional investment experts manage mutual fund assets in a way that minimizes risks and can beat inflation over a longer horizon to create long term wealth, Tamjeed said.

He suggested making monthly investments in mutual funds under a systematic investment plan (SIP) over the year that can help maximize the tax rebate and also grow wealth sustainably.

Asset managers have also floated specialised funds to invest in fixed-income securities and Shariah-compliant securities.

The mutual fund industry in Bangladesh has been beating market benchmarks for years.