Maximizing Tax Rebate: Strategic Planning for High Net Worth Individuals and Emerging Middle-Income Taxpayers

Author: SRCO Business Insights | June 23, 2024

High net worth individuals (HNWIs) in Bangladesh can claim a 15% tax rebate on up to 20% of their annual taxable income, or Tk 1 crore, potentially reducing their annual tax liability by up to Tk 15 lakh. Meanwhile, most emerging middle-income taxpayers can limit their yearly income tax to the minimum amount of Tk 5,000.

To benefit from these rebates, individuals must show proof of recognized savings, investments, or donations at the end of the fiscal year. However, many people rush to make these investments in June, creating unnecessary pressure to accumulate a large sum quickly. To avoid this, it is advisable to plan and spread investments throughout the fiscal year.

Strategic Planning for Small Savers

For small savers, regular monthly deposits in scheduled banks’ deposit pension schemes (DPS), investments in national savings certificates (NSC), payments of life insurance premiums, and contributions to provident funds can help maximize tax rebates.

• DPS: Limited to Tk 60,000 per year for tax rebate purposes.
• NSC: Limited to purchases worth Tk 50 lakh for tax rebate purposes.
• Life Insurance and Provident Fund: Subject to practical limits.

Investment Strategies for HNWIs

HNWI taxpayers often need to look beyond traditional savings instruments to maximize their tax rebates, due to the caps on DPS and NSC investments. Capital market instruments, such as stocks, treasury bonds, and mutual funds, offer higher potential for tax rebates.

• Stocks and Capital Market Instruments: While these have no mandatory holding period for tax rebate eligibility, they carry the risk of capital erosion.
• Treasury Bonds and Mutual Funds: Less risky than stocks and offer limitless investment opportunities. Despite their benefits, they are not yet popular in Bangladesh.

Those familiar with stock and treasury bond investments can directly invest in these instruments for tax rebates. For those less experienced, mutual funds managed by professional asset managers are an effective alternative.

Benefits of Mutual Funds

Mutual funds, managed by professional investment experts, minimize risks and can outperform inflation over the long term, creating sustainable wealth. Investing in mutual funds through a systematic investment plan (SIP) throughout the year can maximize tax rebates and grow wealth.

Specialized Funds

Asset management firms have also introduced specialized funds that invest in fixed-income securities and Shariah-compliant securities. The mutual fund industry in Bangladesh has consistently outperformed market benchmarks, making it a reliable option for maximizing tax rebates and securing financial growth.

By planning investments early in the fiscal year and leveraging diverse financial instruments, taxpayers can effectively reduce their tax liability and enhance their financial stability.