Bucket Theory for Tax Planning
Buckets are such a tools which we have been using from generations. It’s very simple to use. We use buckets for water, popcorn and what not. Today I propose a theory around buckets called “Bucket Theory” for tax planning in India (and similar tax structure countries).
In India we have several tax codes under which we are allowed to save taxes, i.e. 80C, 80CCD, 80EE etc. The 80C tax code being popular among them. All these tax codes have different limits and the eligibility criteria, as can be read consolidated list at Bank Bazar.
I do not intend to elaborate on those tax codes in this post, as it’s already attempted by many, instead, I want to introduce a theory to make us understand whether we are using them optimally.
For sake of simplicity lets assume that each tax code is a different size popcorn bucket.
Image Credit The PaperCup Company.
Our aim should be to make full use of available popcorn buckets to save taxes wherever we are eligible.
If we do not use it to the full capacity then we will have a half bucket of popcorn for the full price of it. Would you accept it on your next Movie? I am sure you will not.
If we keep bucket empty then we anyway pay taxes on those tax codes where we could have saved tax on. It’s like buying empty bucket of popcorn on price of full popcorn bucket. You are making fool of yourself by such a trade.
Over spilling the bucket with extra popcorn is not going to help you either as it will fall out of bucket and you will not be able to enjoy such popcorn. Same way, having extra investment into some tax code is not helping either. For example, making more than 1,50,000 rupees investments in 80C tax code is like spillover, you are not going to enjoy any tax benefits for spillover amount.
So go ahead and fill all you tax buckets to the fullest. Neither empty nor spillover. Just ensure to fill that bucket to full capacity.
Ensure to fill it with good popcorn otherwise, you will have full bucket popcorn at full price but you will anyway throw it out, So choosing good enough product to save tax is as important as thought of saving tax itself. In fact, it’s better to pay taxes instead of investing in a bad product to save tax. Just to save tax of say 3,000 rupees you will end-up investing your hard earned 10,000. And that bad product may not be worth of 7,000 at the time of requirement. So you denied money to the government and you did not benefit either, product company made profits here. Won’t it be better to give 3,000 to the government in such cases?
We still have many months to fill our tax buckets, so go ahead and fill those buckets to fullest with good enough popcorn and don’t forget to enjoy your movie at year end.
Originally published at The Simple Personal Finance.