A Look At Indian Taxes

February 19th, 2008 Living Off Dividends Posted in Random |

India is a land of many contradictions. And I don’t mean in a good way. One of the most prominent examples is the government-sponsored discrimination. India proudly assets itself as a secular state. Wikipedia defines secularity (adjective form secular) as the state of being separate from religion. However, this isn’t borne out in principle. If you belong to any specific ethnic or religious minority, then regardless of your economic status, you’re given preferential admission in colleges and government jobs.

Imagine giving admission to a D student in a Medical College, graduating him with a D grade and then giving him a secure, life-time-guaranteed government bank job, solely because he was from a minority group! Poor students from ethnic backgrounds aren’t the ones who take advantage of this. Its usually the educated and economically well-off people that even knows about these “reservation quotas”. In some southern states its so bad that less than 25% of college seats are based on merit.

Another strange law is the fact that while polygamy is illegal amongst the Hindus in India, Muslims are allowed up to 4 wives. I don’t know if any other ’secular’ country that allows this. As if that weren’t enough, even the taxes are different.

Under the Hindu United Family Act, a Hindu family can set up a separate tax entity called the HUF account. Since it’s common (or was common) for families to live jointly together along with grandparents, sons, the sons families and unmarried daughters could pool money into a separate HUF account.

As an example, suppose I live and work in India. I would of course have to pay tax on my earned income. However, I can transfer my savings/investments to either my HUF or my Dad’s HUF. (Even if my father is deceased, his HUF still continues in his name with me as the beneficiary and as the account holder). Essentially, this creates 2 extra tax entities for me to split my income into.

Its very easy to hit the highest tax brackets in India as the tax brackets are very low (I’m not 100% certain, but I think you hit 33% at $7,500). The standard deductions are also different for men and women. (They’re higher for women, I think to incentivise them to work). So being able to split income this way definitely helps reduce your taxes.

So I guess the question is, would you change your religion if it meant you could have multiple wives, or if it meant you would pay less tax? I know Hindus with multiple wives and Muslims who evade their taxes, so this isn’t any sort of issue in India, but if it was really enforced, what would you do?

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