Tax Rate Card - Direct Tax Code

Tax Rate Card - Direct Tax Code

Planning your taxes

It’s been almost a month since the government cleared the Finance Bill 2010. Now that rules of the tax game are clear, it’s important for you to establish your tax planning strategy, which should essentially be linked to your medium- and long-term financial goals. As an early start gives you the edge of achieving the right balance between your investment growth and tax management, clearly, it is important to start right away. Here's how you can effectively plan your taxes for the Financial Year (FY) 2010-11.

Tax Saving - Planning Options for Employees

EPF and PPF

Returns: 8.5% (EPF) and 8 per cent (PPF) per annum

Maximum deduction: Rs 1 lakh for EPF; Rs 70,000 for PPF

Income: Tax-free


It's compulsory and it's safe. However, in March, the Employee Provident Fund's (EPF) chief importance is that it automatically reduces the amount you must invest to exhaust the Rs 1 lakh limit. Jokes apart, the EPF has several advantages for taxpayers. To begin with, it offers a steady return of 8.5 per cent. Secondly, you cannot withdraw the money until you retire or change your job. This means you are exploiting the power of compounding to the fullest over your career span.

The best part is that the interest and the withdrawals are tax-free, a benefit available only in a couple of other products.


All these features make the EPF ideal for investing for a retirement corpus. However, if you really need the money, the authorities have the discretion of allowing you one withdrawal during your career even if you haven't changed your job or have not retired. For this, you must submit proof of expense for which the withdrawn amount will be used. Typically, a trans-Europe trip does not qualify as adequate reason for dipping into the EPF. If these features seem attractive, you can increase the contribution to the EPF from the mandatory 12 per cent to 25 per cent of your basic salary.


The returns from the Public Provident Fund (PPF) are slightly lower at 8 per cent per annum, but the interest and withdrawals are tax-free. The advantage over the EPF is greater flexibility of withdrawals. The maturity period of the PPF is 15 years. However, you can dip into the fund from the seventh year onwards. The maximum limit of withdrawal is 50 per cent of the account's balance as in the previous year or in the previous three years, whichever is lower. The cut-off date for calculating the balance is March 31, the last day of the financial year.

In case you want the money before the seventh year, you can take a loan from the account up to 25 per cent of the balance in your account in the third year. The loan must be repaid in a maximum of 36 EMIs. The interest on the loan works out to 12 per cent. As the interest on the money is not redirected to the PPF, it may be good idea to avoid taking a loan.


Five-year FDs and NSCs

Returns: 7-8%

Maximum deduction: Rs 1 lakh

Income: Fully taxable


The National Savings Certificates are currently on a par with the PPF in terms of pre-tax returns. But they lose out to the PPF and EPF because the returns are taxable, thus reducing the post-tax yield. Needless to say, they are equally safe and have the advantage of a shorter lock-in period of six years.


The tax treatment of NSC income makes all the difference for taxpayers who have an income that falls within the 30 per cent tax slab. However, if you are a retiree or have an annual income lower than Rs 3 lakh, the tax rate is marginal (only 10 per cent, plus 3 per cent cess). Five-year fixed deposits also have a short lock-in period and offer almost the same returns. The difference is that the interest rates of FDs are more variable and the deposits in private banks are not as safe.


Senior citizens' savings scheme

Returns: 9 per cent per annum

Maximum deduction: Rs 1 lakh

Income: Fully taxable


Whether or not you are looking forward to a retired life, there is one sure reason to celebrate. It is called the Senior Citizens' Savings Scheme, which offers a higher rate of returns 9 per cent than most bank deposits. Though the income is taxable, it is unlikely that you will pay tax because the exemption limit for senior citizens is Rs 2.4 lakh per year.


The twist is that though you are eligible for earning 9 per cent interest after the age of 60, the tax exemption limit comes into effect only after you complete 65 years. Never mind this minor problem. The impact of the extra tax paid in five years will be minimal compared with the long-term benefits of this scheme. So do not ignore this option if you are planning a carefree retired life.


Equity-linked saving schemes

Returns: Market-linked

Maximum deduction: Rs 1 lakh

Income: Tax-free


They have been in the recovery mode since 2009, giving returns of about 76.1 per cent last year. This bounceback from the lows of 2008 (the ELSS funds lost 55.5 per cent on an average) proves that long-term investors cannot overlook the ELSS for saving tax. The returns offered by these funds are unmatched by any other tax-saving instrument. Of course, they have the same risk profile as other equity funds. However, you can play your cards right by choosing funds that have been consistent performers and by staying invested for long periods.


To further hedge your risk, you can invest via SIPs that give you the benefit of averaging out costs. This automatically makes tax planning a year-long affair, as it ought to be. You also have the option to choose dividend payouts for periodic payments. This doesn't affect the taxability of income as both dividends and capital gains at the end of the three-year lock-in period are tax-exempt.


Unit-linked insurance plans

Returns: Market-linked

Maximum deduction: Rs 1 lakh

Income: Tax-free

Last year, Ulips got a major facelift. The insurance regulator capped the difference between the gross yield and the net yield earned by a Ulip. The ceiling is 3 per cent for Ulips with a tenure of less than 10 years and 2.25 per cent for policies with longer tenures. However, mortality charges have been kept out of this calculation. The rule became effective from 1 January 2010.


Now that the steep charges are gone, you have hardly any reason to ignore this instrument that combines equity exposure, life cover and tax savings. In fact, if the Swarup Committee's recommendations are accepted, all the upfront commissions of Ulips will be phased out by 2011. Therefore, investing in this product will become more profitable. Understanding the features of this financial instrument is important to optimise its benefits. For instance, in addition to saving tax, Ulips can also act as an effective allocation tool. This is because Ulips allow investors to change the equity-to-debt ratio without any penalty for a fixed number of switches every year. Even if you are not market savvy and are unable to take the decision on your own, there are Ulips that change the allocation according to your life stage.


However, if you are looking at short-term returns, stay way from Ulips. This is because they may not be able to recover the upfront charges unless you stay invested for at least 10-12 years. Do not be swayed by agents who claim that you only have to pay premiums for a minimum period of three or five years. In this way, your corpus is not likely to grow enough and will only be able to pay the charges for the life cover.


Life insurance policies

Returns: 5-6%

Maximum deduction: Rs 1 lakh

Income: Tax-free


There may not be many advantages to the expensive endowment or money-back policies that your friend had recommended a few years ago, but there is one silver lining. The premium of the policy is covered by Section 80C of the Income Tax Act and is exempt from tax. This is not to say that you must buy such a policy now. If you are inadequately insured, opt for pure term plans, which are significantly cheaper than traditional policies. In fact, the premiums paid for all insurance policies that cover you, your spouse and dependent children are exempt from tax. But remember that experts are against buying insurance for saving tax alone. The latter should be an added advantage.


Pension plans

Returns: Market-linked

Maximum deduction: Rs 1 lakh

Income: Pension income taxable


It's a must-have for all investors. If your employer does not provide one, buy a pension policy that ensures a steady income after retirement. What can be better than earning tax benefits on the investment as well?


There are three types of pension plans to choose from. The first is the unit-linked pension plan. It offers greater control over your retirement corpus by allowing you to choose the mix of equities and debt according to your risk appetite. A unit-linked pension plan is not as costly as a Ulip because it does not offer life insurance.


However, keep in mind that on maturity, only 33 per cent of the corpus can be withdrawn tax-free. If you do not get gratuity, up to 50 per cent of the pension corpus can be commuted. You must use the balance to buy an annuity from an insurance company that will give a monthly pension.


This pension is fully taxable.

The second type of pension plan is offered as a mutual fund. In most of these funds, the money cannot be withdrawn before the investor turns 58. Even if early withdrawals are allowed, you have to pay a penalty. For instance, the Templeton India Pension Plan charges a hefty 3 per cent exit load on amounts withdrawn before the vesting age of 58.


The third option is the New Pension Scheme (NPS) launched with much fanfare in 2009. However, it is yet to attract investors in hordes. To know more about why the scheme has been a non-starter, read our story 'All you Need to Know About Pension' on our Website, www.moneytoday.in. Sign up only if you are convinced that the NPS has the potential to take care of your pension needs. The contributions fall within the Section 80C ambit.


Home loan EMI

Maximum deduction: Rs 1 lakh


For the past few months, the hefty home loan EMI had been one of the most important reasons employees feared the job axe. Now, the same EMI is cause to rejoice. The cumulative principal of your EMIs is eligible for a Section 80C deduction. This is usually a large amount and, along with the Provident Fund, should take care of most of your Rs 1 lakh limit. If you also factor in the deduction available under Section 24 on the interest paid, the effective loan rate comes down significantly.


Another way to increase the benefit is to take a joint loan with a sibling, spouse or parent. This way, both coowners of the property can claim individual tax benefits on the home loan. A word of caution: do not let tax saving inspire you to extend your loan tenure. It is equivalent to spending more to get a discount. The shorter the tenure of a mortgage, the better it is.


Tuition fees

Maximum deduction: Rs 1 lakh


The ever-increasing school fees of your children could burn a hole in your wallet. There is some respite because the tuition fee of up to two children is taxdeductible. Note that only the tuition fee is included. Other myriad charges in various forms, such as the building development fee, bus fee, etc, are not eligible for deduction. Another rider is that the fee must be paid to a recognised educational institution in India. This means that playschools, foreign colleges and private coaching classes do not qualify. Also, the fee must be paid for the taxpayer's children, not siblings, nephews, nieces or grandchildren.


The benefit cannot be availed of by both the parents. If there's one child, only one of the parents can claim tax benefits on the school tuition fee. Otherwise, each parent can claim tax benefit for different children. Even so, the tax benefit is helpful, especially for those who can't save enough to cut taxes.

via Indiainfoline/Money Today

Tax Planning for 2009

The Public Provident Fund (PPF) offers tax exemption on the invested amount, there`s no tax on the interest earned, and even withdrawals are tax-free. Most importantly, the PPF is a government-sponsored scheme and is, therefore, completely safe.

The various tax-saving avenues under Section 80C can be used by individuals to suit their financial needs. We analyse the available options.

This is everybody's favourite tax-saving option and it's no surprise. The Public Provident Fund (PPF) offers tax exemption on the invested amount, there's no tax on the interest earned, and even withdrawals are tax-free. Most importantly, the PPF is a government-sponsored scheme and is, therefore, completely safe.

The other huge attraction of the PPF is that you can take a loan from the account in the third year or make partial withdrawals after the sixth year. The loan can be up to 25% of the balance in the account and has to be repaid in not more than 36 EMIs. Of course, if the thought of paying a 12% interest on your own money is galling, you can opt for a partial withdrawal after the seventh year.

PUBLIC PROVIDENT FUND (PPF)

The old faithful | Maximum limit: Rs 70,000
Not locked up for 15 years

When possible Limit
Loans In 3rd financial year 25% of balance in account at end of first year
Partial withdrawals In 7th financial year 50% of balance in account 3 years previously or in previous year
March 31 is the cut-off date for calculating the balance for the year.

You can withdraw up to 50% of the balance in the account that was present three years previously or in the previous year, whichever is lower. The end of the financial year (March 31) is taken as the cut-off date for calculating the balance. So, if a PPF account was opened in 2002-3, then the first withdrawal can be made during 2008-9 and the amount will be limited to 50% of the balance on 31 March 2005 or 31 March 2008, whichever is lower. This facility is particularly useful if you're facing a cash crunch. Simply withdraw from the PPF account and reinvest.

However, don't go overboard while investing in PPF. In the long run, its returns will never be able to match the phenomenal potential of an equity-based option. If you can stomach a little risk, don't put too much in this low-return avenue.

Advantages

1. Completely safe
2. 8% assured returns
3. Income is tax-free
4. Contribution is flexible

Drawbacks

1. Returns lower than prevailing FD rates
2. Withdrawals limited
3. Locks up capital for the long term

Best Suited For

Risk-averse investors, self-employed professionals and those not covered by the EPF.

FIVE-YEAR FIXED DEPOSITS

Returns are high, but taxable | Maximum limit: Rs 1 lakh
Best five-year FD rates
Bank Interest Rate (%) Post-Tax Yield (%)
ICICI 9.0 7.85
Oriental Bank of Comm 9.0 7.85
Indian Overseas Bank 9.0 7.85
Bank of Baroda 8.5 7.32
Axis Bank 8.5 7.32
Post-tax yield for an investor in the highest tax bracket

Never judge a book by its cover, they say. Or the suitability of an investment option by its advertisement. Banks are crying themselves hoarse with offers of attractive rates of interest on fixed deposits.

At 9%, the returns offered are higher than what your PPF contribution earns. But then, as another cliche goes, if it's too good to be true, it probably is. In this case, the income earned on the fixed deposit is taxable; it is added to your income for the year and is taxed at the applicable rate. So, if your income is in the 30% tax bracket, the post-tax return from the fixed deposit is actually lower than what the PPF offers.

There's also the vital issue of safety. Banks are perceived as safe havens. But in 2008, we saw that even these safe havens can fall. So, steer clear of little-known private and cooperative banks that offer great rates. If they fold up, your money is gone. Stick to public sector banks and well capitalised private entities. They might offer rates that are a tad lower, but at least your capital will be safer.

Fixed deposits are suitable for retired taxpayers and those with an income of less than Rs 3 lakh a year. At that income level, the tax rate is only 10% (plus 3% cess), which still leaves a lot on the table for the investor. Retirees have another option in the Senior Citizen's Savings Scheme.

Advantages

1. Attractive returns of 9%
2. Widely available
3. Shortest lock-in (5 years) among debt options

Drawbacks

1. Income is taxable
2. Safety not assured
3. May not match returns from equity over 5 years

Best Suited For

Senior citizens who don't want to go in for long-term options; those in low tax bracket.

EQUITY-LINKED SAVING SCHEMES (ELSS)

Rewarding for risk-takers | Maximum limit: Rs 1 lakh
The five best schemes
Scheme NAV (Rs) Returns in 6 Months Returns in 1 Year Returns in 3 Years
Sundaram Paribas Taxsaver 23.57 -22.04 -49.05 4.56
Canara Robeco Tax Saver 11.13 -19.11 -48.17 4.42
Principal Personal Taxsaver 46.43 -38.94 -62.53 1.79
Sahara Tax Gain Fund 17.00 -20.75 -50.01 1.37
Franklin India Taxshield 96.00 -25.21 -50.50 -0.46
Category Average
-31.26 -56.86 -4.73
Returns as on December 26, 2008. Three-year returns are annualised.

Equity-linked saving schemes were seen as the best things since sliced bread till the markets crashed. Today, the same investors who went to town recommending ELSS to their friends and family are sitting tight; some of them have stopped their SIPs. After all, who wants market-linked returns when the market has more than halved in value in 12 months?

But this is exactly why you should give ELSS a chance. "To make money in equities, one has to jump in when there is an overwhelming fear because that's when a lot of assets get undervalued due to irrational pessimism," says Ajay Bodke, senior fund manager, equities, IDFC Mutual Fund.

Experts are unanimous that the stock prices would revive after some time. "The markets are likely to bottom out in a couple of months. After this, there could be a phase of very low activity and a revival may happen some time during October-December. Therefore, the best time for investing is between now and April," says Jayesh Shroff, fund manager, equity, SBI Mutual Fund. If you intend to invest in equities in 2009 and still have some tax planning to do, ELSS funds should be your first choice.

Yes, of course an ELSS carries the same risks as an equity fund. But the risk is not high if you are a long-term investor who doesn't get spooked by notional losses. "Fear and greed linked to short-term market movements eventually lead to mistakes. Last year's trend in equity markets should not come in the way of regular, steady investing," says Anup Maheshwari, executive vice-president and head of equities & amp; corporate strategy, DSP BlackRock Investment Managers.

Analysts also believe that the markets will continue to be volatile in the short to medium term. The best way to beat volatility is by taking the SIP route which averages out your cost of purchase.

Advantages

1. Stock markets at a low
2. All income is tax-free
3. Short lock-in period of three years

Drawbacks

1. Returns and risk are market-linked
2. Investor cannot exit even if markets crash

Best Suited For

Investors with a longterm horizon who are not averse to taking calculated risks.

UNIT-LINKED INSURANCE PLANS (ULIPS)

Not for short-term investors | Maximum limit: Rs 1 lakh
Tax-free Gains

Short-Term Gains Long-Term Gains
Ulips Nil Nil
Equity funds 15% Nil
Debt funds Marginal rate 10%

What is a Ulip? To the short-term investor, it is a high-cost mutual fund that charges an entry load of 30-40%. To the long-term investor, it is a useful asset allocation tool. To the savvy investor, it is a great way to time the market by switching in and out of equities without paying any short-term capital gains tax. And to taxpayers, it is an investment plan that gives tax benefits, insurance cover and the possibility of great returns.

So why are so many Ulip investors planning to change them to paid-up policies? Thanks to the market crash of 2008, the value of the corpus invested in equities has almost halved. But, says Anuj Agarwal, CFO of SBI Life Insurance: "Over an investing horizon of 20 years, the crash of 2008 will be a small blip."

Clearly, Ulips are not for short-term investors. Invest only if you plan to continue with the policy for at least 10-12 years. Before that, the Ulip may not be able to recover the high charges that are levied in the initial years. While mutual funds charge an entry load of 2-2.5% (and even that is waived for direct investors), Ulips charge up to 40% in the first year, 20-25% in the second year and 5-10% in the third year. "Ulips are ideal for individuals who are willing to take a higher risk to seek a higher return," says Manik Nangia, corporate vice-president and head of product management, Max New York Life Insurance.
Tips
Use the switching facility in the Ulip pro-actively to rebalance your portfolio.
If you don't want to pay high initial charges, use top-up facility to increase investment.
Invest only if you can continue for 10-12 years. Before that, a Ulip may not be viable.

Ulips score over ELSS funds because they allow switching between the equity and debt options. Investors can change their asset allocation depending on the market movement. And they don't pay any capital gains tax on this. Some plans, such as the Horizon Automatic Allocation Plan from SBI Life Insurance, even reallocate the corpus based on the life stage of the policyholder. A young person may have a bigger portion of his corpus invested in equities, but as he grows older the plan gradually shifts funds from equity to debt.

Advantages

1. Investors can switch between stocks and debt
2. All income (short-term and long-term) is tax-free
3. Short lock-in of 3 years

Drawbacks

1. Initial charges of 30-40%
2. Returns and risk are market-linked
3. Lucrative in the long term
4. Can't switch insurers

Best Suited For

Pro-active investors who want to rebalance investment portfolios without attracting capital gains tax.

LIFE INSURANCE

Should be bought for protection, not to save tax | Maximum limit: Rs 1 lakh
High-cost, low returns
Scheme Traditional Policy Term Plan-PPF Combo

Endowment Plan Term Plan PPF
Premium 12,000 3,500 8,500
Insurance cover 3 lakh 10 lakh Nil
Corpus on maturity 9 lakh Nil 10 lakh
Premiums for a 30-year-old for 30-year plans.
The term plan-PPF combo gives you a higher cover and a bigger corpus on maturity.

The fourth quarter is a busy season for insurance companies. That's when they conduct almost 35% of the total business for the year. Till a few years ago, this figure was as high as 50%, clearly showing that customers were buying insurance policies not as a risk cover but as tax-savers. The tax benefits on a policy are meant to reduce the cost of life insurance. They should not be seen as an end in themselves.

Buying a policy only to save income tax defeats the purpose of life insurance and leads a person to make a sub-optimal choice. The premium will be the deciding factor, not the cover he gets from the policy.
Tips
If you have paid premiums for at least three years, you can surrender the insurance policy.
But surrender value is very low in the inital years. You may get only 30% of the premiums paid.
A better idea is to convert it into a paid-up policy. The cover continues but premiums stop.

If you must have insurance in your tax-planning basket, traditional plans such as endowment or money-back policies are not a great idea. As the table shows, a term plan-PPF combo is better.

However, if you already have a policy, you may have no choice but to continue with it till the end of the term. You could surrender it if you have already paid the premiums for three years, but the surrender value is very low and you may get only 25-30% of the premiums paid. If only a few years are left for the policy to mature, don't surrender.

A better option is to convert the plan into a paid-up policy. This means the life cover continues but you stop paying the premium. This amount gets deducted from the policy corpus every year.

Advantages

1. Provides life insurance cover
2. Forces you to save
3. All income received is tax-free

Drawbacks

1. Traditional policies offer low cover at high premium
2. Returns are low
3. Gives false confidence of adequate insurance

Best Suited For

Investors who already have traditional insurance policies; not a good option to begin now.

PENSION PLANS

Planning for retirement | Maximum limit: Rs 1 lakh

The rising cost of living, higher life expectancy and the breakdown of the joint family system have made it imperitive to include a pension product in every financial plan. But the days of the defined pension benefit are over and we are now in a defined contribution regime, where our pension will depend on what we accumulate through the years.
Tips
If you do not get gratuity, up to 50% of the pension corpus can be commuted.
The New Pension Scheme to be launched this year will be open to non-government workers also.
Pension funds will soon be allowed to invest in more lucrative options.

The good news is that even if your employer does not offer you a pension plan, you can buy one from an insurance company. What's more, unit-linked pension plans offer greater transparency and control to the investor. One can choose a mix of equities and debt in the pension plan depending on one's risk appetite.

We must put in a word of caution here. If you are saving for retirement, don't take too much risk with the money. "If someone who is retiring this year had invested his money in an equity option of a pension plan last year, he would have been pauperised," says Vikas Vasal, executive director, KPMG. A balanced option, where the corpus is divided between equities and debt, is best.

A unit-linked pension plan is not as costly as a Ulip because it does not offer life insurance. But there are other things that an investor needs to keep in mind. On maturity, only 33% of the corpus can be withdrawn and is tax-free. The balance has to be used to buy an annuity from any insurance company, which will give a monthly pension. Incidentally, this pension is taxable.

Some mutual funds also offer pension plans. In most plans, the money cannot be withdrawn before the investor turns 58. Even if early withdrawals are allowed, you have to pay a penalty. The Templeton India Pension Plan, for instance, charges a hefty 3% exit load on amounts withdrawn before the vesting age of 58.

Advantages

1. Creates a long-term retirement cushion
2. No tax on 33% of corpus commuted on maturity
3. Not bundled with life cover

Drawbacks

1. Locks up money for the long term
2. Balance 66% of the corpus has to be put in annuity
3. Pension is taxable

Best suited for

Long-term investors who are not covered by the Employee Provident Fund or any other pension scheme.

HOUSING LOAN REPAYMENT

Reduces the cost of the loan | Maximum limit: Rs 1 lakh
Principal Advantage
Year Principal Repaid Tax Benefit*
1 58,175 17,453
2 64,906 19,472
3 72,417 21,725
4 80,798 24,239
5 90,148 27,044
6 1,00,579 30,000
7 1,12,218 30,000
8 1,25,207 30,000
9 1,39,694 30,000
10 1,55,858 30,000
*Assuming investor's income is in 30% tax bracket Rs 10 lakh loan at 11% for 10 years.
A major part of the Section 80C exemption is taken care of by the home loan repayment. The tax benefit will go up if the Rs 1-lakh limit is raised this year.

Three years ago, the interest rate on a home loan was around 8%. Now, it is 11.5%, which means an increase of almost three years in the loan tenure. You can either prepay a part of your loan or increase the EMI amount if you want to reduce the tenure. You might be tempted to increase the EMI amount, but then, that's likely to eat into the money you've set aside to invest in tax-saving schemes. Here's how you can have your cake and eat it too.
Tips
Take a joint loan with spouse, sibling or parent. This way, both co-owners of the property can separately claim tax benefits on the home loan.
Don't let the tax breaks tempt you to extend the tenure of your home loan. The shorter the tenure, the better it is.

The principal portion of a home loan EMI is eligible for deduction under Section 80C. As the table shows, your repayment of a Rs 10-lakh loan takes care of a sizeable chunk of the Section 80C limit in the first few years. By the sixth year, it completely does away with the need for any further tax-saving investments. So, even if you don't have surplus money to invest, your home loan repayment ensures that you don't lose out on Section 80C benefits. If you factor in this tax benefit and the deduction available under Section 24 on the interest paid on the home loan, the effective rate of interest comes down significantly.

What do you do if the principal repaid in a year exceeds the Rs 1-lakh limit under Section 80C? This is quite common because the average loan amount disbursed by the State Bank of India has risen from Rs 5.5 lakh in 1998 to almost Rs 18 lakh now. In such cases, it might be a good option to take a joint loan (preferably with a working spouse or even with a sibling or parent). That way, both co-owners can separately claim the tax benefits available on the home loan.

What many people don't know is that even the amount spent on stamp paper and registration of the property is deductible under Section 80C. That brings down the effective cost of the property itself.

Some investors let the tax breaks available on home loans guide their decision on the tenure of the home loan. They keep the EMI low and extend the tenure to claim as much tax benefit as possible. However, they overlook the fact that the interest cost sometimes outweighs the tax benefits.

THE TAX SLABS
Your investments under Section 80C are fully deductible from your taxable income. Find out your tax liability after the tax deduction.
Male taxpayers
Female taxpayers Senior citizens
Annual Income Tax Rate Annual Income Tax Rate Annual Income Tax Rate
Up to Rs 1.5 lakh Nil Up to Rs 1.8 lakh Nil Up to Rs 2.25 lakh Nil
Rs 1.5 lakh to Rs 3 lakh 10% of income above Rs 1.5 lakh Rs 1.8 lakh to Rs 3 lakh 10% of income above Rs 1.8 lakh Rs 2.25 lakh to Rs 3 lakh 10% of income above Rs 2.25 lakh
Rs 3 lakh to Rs 5 lakh Rs 12,000 + 20% of income above Rs 3 lakh Rs 3 lakh to Rs 5 lakh Rs 12,000 + 20% of income above Rs 3 lakh Rs 3 lakh to Rs 5 lakh Rs 7,500 + 20% of income above Rs 3 lakh
Above Rs 5 lakh Rs 52,000 + 30% of income above Rs 5 lakh Above Rs 5 lakh Rs 52,000 + 30% of income above Rs 5 lakh Above Rs 5 lakh Rs 47,500 + 30% of income above Rs 5 lakh
There is also a 3% education cess on the payable tax and a 10% surcharge on the total tax if the income exceeds Rs 10 lakh a year.

TUITION FEES

Tax sops on a necessary expense | Maximum limit: Rs 1 lakh
Tips
Tax benefit only on tuition fees paid to a recognised educational institution in India.
Playschools and private coaching classes not covered.
Benefit only for fees paid for two children of the individual.
Both spouses cannot avail of the benefit for the same child.

School and college fees seem to be rising inexorably, but there's no way you're going to compromise on your child's education, is there? Here's something to make those exorbitant fees a little less bothersome: you can claim tax benefits under Section 80C for tuition fees for up to two children. But remember, the tax benefits are only for fees paid to recognised educational institutions in India; playschools, foreign colleges and universities and private coaching classes do not qualify for the deduction.

Besides, the tax benefit is available only on the tuition fees and not on other charges or expenses. So capitation charges, admission fees, transport, etc, are also ruled out. Most importantly, the fees have to be for the taxpayer's own children and not siblings, nephews, nieces or grandchildren.

The other point that must be kept in mind is that this particular benefit cannot be availed of by both the parents. If there's only one child, only one of the parents can claim the tax benefits on the school tuition fee. Otherwise, each parent can claim the tax benefit for different children.

Slow & Steady Wins the Race

It's the time of the year when we need to think of our tax-saving investments. No, this article isn't appearing three weeks later than it ought to have. You are reading this on 9th April and I'm talking about this year. This is actually the right time to plan for the tax-saving investments that many, if not most of us, would normally wait for till about March 2008. Perhaps we have become so used to catching deadlines at the last moment that we don't even think of planning taxes till very late in the year. Since we all see tax-planning as the purpose of these investments, and we get exactly the same tax break no matter when we make the investment, it seems fine if we ignore them till very late in the year. However, this is not true. There are a lot of advantages of planning these tax savings investments right at the beginning of the year and spreading them out throughout the year. Let's see how.

For most salary earners, the formula that tells how we should decide where to make our Section 80C investments is very simple in my opinion. Just subtract your annual provident fund contribution and any other pre-committed 80C eligible deduction (school fee, insurance premium etc) from Rs 1 lakh and invest the balance in a good tax-saving equity mutual fund (sometimes called ELSS funds). Since tax-saving investments are long-term investments, equity makes the most sense. However, equity investments offer higher returns and lower risk if you invest steadily over a period of time instead of all at one go.

Therefore it's best to calculate the amount you need to invest during the year, divide it by 12 and start an SIP (Systematic Investment Plan) for that amount right now in the month of April.

Investing in this drop-by-drop fashion has many advantages. For starters, you will invest without feeling the pinch of a large outgo at the end of the year. When March 2008 comes you will already be through with investments. Just as important, investing gradually in equal monthly amounts will protect you from the vagaries of the stock markets. You will end up acquiring more fund units when the markets are down, something that will automatically ensure higher gains eventually. This is always the best way to invest in equities and the predictable nature of tax-saving investments makes it specially easy to do it this way.

However, even if you decide that equity is not your cup of tea and you'd rather stick to a guaranteed investment like Public Provident Fund (PPF) or bank fixed deposits (which are now eligible for deduction under section 80C), it still makes sense to invest steadily throughout the year rather than at the end just to avoid a single big hit in March. In fact, if you are going to invest in PPFs or FDs and you happen to have the money lying around in a savings account or another ready form, then it's probably better to do the entire investment right now. After all, the tax savings investments have a lock-in period and the sooner you start the lock-in, the sooner it will eventually end and thus free up the money for other uses.

Finance Bill 2007 and personal taxation

What changes are proposed relating to the rates of taxation?

While the rates of income-tax are not proposed to be changed, there is a new levy, the secondary and higher education cess, which would be 1 per cent of the tax and surcharge.

This cess will be computed only on the tax and surcharge and will not include the additional surcharge, which 2 per cent now. This will apply to all assessees. In the case of individuals and HUFs (Hindu undivided family) the basic exemption has been raised by Rs10,000. The tax rates for various slabs will be as in the table.

It is also proposed to amend the provisions of Section 115O to provide for a tax on distributed profits at 15 per cent against 12.5 per cent now. It is proposed to amend Section 115R to provide for tax on distributed income on mutual funds to be computed as follows:

25 per cent on income distributed by a money market mutual fund or liquid fund

12.5 per cent on income distributed by a fund other than a money market mutual fund or liquid fund if the distribution is to an individual or HUF.

20 per cent on income distributed by a fund other than a money market mutual fund or liquid fund if the distribution is to any other person.

The term money market mutual fund is proposed to be defined to mean a money market mutual fund as defined in Section 2(p) of the Securities and Exchange Board of India (Mutual Funds) Regulations, 1996 and a liquid fund is proposed to be defined to mean a scheme or plan of a mutual fund which is classified by SEBI as a liquid fund in accordance by the guidelines issued by it in this behalf under the SEBI Act, 1992 or the regulations made there under.

Are there any new assets which will be charged to capital gains on transfer?

To bring within the ambit of capital gains certain personal effects, an amendment is proposed to Section 2(47) to exclude from the definition of the term personal assets, archaeological collections, drawings, paintings, sculptures or any work of art, which would mean that the transfer of these assets would be chargeable to capital gains.

What are the changes proposed with regard to making investments in bonds for claiming exemption in respect of long-term capital gains?

Section 54EC of the Income-Tax Act, 1961 provides tax exemption on capital gains arising from the transfer of a long-term capital asset to the extent such capital gains are invested in `long-term specified assets' within six months from the date of such transfer. The Finance Act, 2006 amended the definition of long-term specified assets so as to mean any bond redeemable after three years and issued on or after April 1, 2006 by the National Highways Authority of India and Rural Electrification Corporation Limited. Such bonds had to be notified by the Central Government in the Official Gazette.

It is proposed to amend the said Section, by substituting the existing clause (b) of explanation, so as to provide that the Central Government, while notifying such bonds in the Official Gazette may lay down in the notification such conditions, including for providing a limit on the amount of investment by an assessee in such bonds, as it thinks fit. This amendment will take effect retrospectively from April 1, 2006. The proposed amendment seeks to regularise the condition stipulated in Notification S.O.2146(E) December 22, 2006, where it was provided that the investment cannot exceed a sum of Rs50 lakh.

It is also proposed to amend the section so as to provide for a ceiling on investment by an assessee in such long-term specified assets.

Investments in such specified assets to get exemption under Section 54EC, on or after April 1, 2007 cannot exceed Rs 50 lakh in a financial year.

What are the changes proposed on allowing deduction for health insurance premium? Will the deduction be allowed if the payment is made by credit card?

Section 80D provides that in computing the total income of an assessee, being an individual or a HUF, the sum paid by cheque to effect or to keep in force an insurance on the health of the assessee or on the health of any member of the family shall be allowed as a deduction.

The maximum amount allowed as deduction is Rs 10,000. In the case of senior citizens, the deduction allowed is Rs 15,000. Similarly, Section 36(1)(ib) provides for a deduction of the amount of any premium paid by cheque by the assessee, as an employer, to effect or to keep in force an insurance on the health of his employees under a scheme framed by General Insurance Corporation formed under Section 9 of the General Insurance Business (Nationalisation) Act, 1972 and approved by the Central Government or by any other insurer and approved by the Insurance Regulatory and Development Authority established under Section 3(1) of the Insurance Regulatory and Development Authority Act, 1999.

To allow deduction for payments made through electronic mode, credit card, etc., it is proposed to amend the provisions of Section 80D and Section 36(1)(ib) so as to provide that the payment of premium made by any mode other than cash, shall be eligible for deduction under these sections. It is also proposed to increase the maximum amount allowable under Section 80D, from Rs 10,000 to Rs 15,000. In the case of senior citizens, it is proposed to increase the limit from Rs 15,000 to Rs 20,000.

Can interest on loan taken for the benefit of relatives education be claimed as deduction?

Section 80E provides for a deduction, from the gross total income of an individual, of the amount paid by him by way of interest on loan taken from any financial institution or approved charitable institution for the purpose of pursuing higher education.

The deduction is available for eight assessment years beginning from the assessment year in which the payment of interest on the loan begins and is available only when the loan is taken for the higher education of the individual.

It is proposed to amend Section 80E so as to allow the deduction of interest on loan taken by an individual for higher education of the individual, the spouse and children.

Is there a proposal to increase the threshold limit for tax deduction at source in respect of interest?

The existing Section 194A(3)(i) provides that deduction of income-tax at source shall not be made in a case where the amount of income by way of interest other than "Interest on securities" does not exceed Rs 5,000.

The amendment proposes that the limit for deduction of tax at source under the aforesaid Section shall be Rs 10,000 where the payer is a banking company or a co-operative society engaged in carrying on the business of banking or a post-office in respect of notified schemes. In other cases, the threshold limit is to be retained at Rs 5,000.

These amendments are proposed to be effective from June 1, 2007.

Tax exemption likely for savings up to Rs 1.50 lakh

With the government exploring various options to attract long-term funds for infrastructure, savings in certain categories up to Rs 1,30,000-1,50,000 a year may qualify for income tax exemption in the coming Budget against Rs 1,00,000 currently.

Over and above Rs 1,00,000, income tax exemption might be given for another Rs 30,000-50,000, especially for infrastructure, sources told PTI. Or alternatively, there might be consolidated savings limit of Rs 1,30,000-1,50,000 they said.

The finance ministry might also go for raising zero income tax slab to Rs 1,50,000 against the current level of Rs 1,00,000, they said.

The Ministry is looking at these three options and one of them may figure in the Budget, the sources said. However, the possibility of raising the income tax slab to Rs 1,50,000 is remote, they said.

In the Budget 2005-06, Finance Minister P Chidambaram raised the savings limit to Rs 1,00,000, which would qualify for income tax exemption under Section 80 C.

The Section provides for tax exemption for investments like insurance premia, contributions to provident fund or schemes for deferred annuities, purchase of infrastructure bonds, payment of tuition fees, repayment of principal amount of housing loans.

This fiscal's budget extended these benefits to fixed deposits of five years of maturity in banks. Banks are demanding that this benefit now be extended to three years of deposits as well.

Infrastructure development requires a whopping $320 billion in the next five years. The finance ministry is evaluating various options to attract funds for infrastructure.

Recently, US-based Citi Group and Blackstone have joined hands with infrastructure finance companies--IDFC and IFCL to raise long term funds for infrastructure.

So far as the slabs are concerned, currently, income up to Rs 1,00,000 does not attract any tax with Rs 1,00,000-1,50,000 drawing tax at the rate of 10 per cent.

Income from Rs 1,50,000 -2,50,000 attract 20 per cent income tax and 30 per cent above Rs 2,50,000. Besides, there is surcharge of 10 per cent on Rs 10 lakh taxable income.

For women, income up to Rs 1,35,000 does not attract income tax and Rs 1,35,000-1,50,000 draws 10 per cent tax rate. Above this level, the tax rates are same as that for men.

Senior citizens get tax exemption up to Rs 1,85,000 and do not have 10 per cent tax slab. There is also likelihood that the Budget 2007-08 would lower the age for senior citizens from 65 years to 60 years, the sources added

Take a joint home loan with your spouse

Do you plan to take a joint home loan along with your spouse? It can be a good decision as the joint effort could get you greater resources to buy a bigger house. But, the big question is who will get the tax benefits on a joint home loan. The good news is that all the co-borrowers can get tax benefits. But, this can happen only if your paperwork is in order. Here are a few points co-borrowers can keep in mind:

Both should be co-owners in the property

Ownership of property makes one eligible to claim tax benefits. A joint home loan involves an applicant and a co-applicant. Housing finance companies insist that the co-owners of the house have to be co-borrowers as well.

However, they do not insist on the reverse. But, it is essential for co-borrowers to be co-owners to seek tax rebate. You cannot get tax benefits if you are just a co-borrower but not a co-owner. Co-borrowers, who are also co-owners, are eligible for tax rebate in the proportion of their share in the loan.

Thus, repayment capacity of each spouse should be taken into account while deciding the share of the loan. So, a couple can be equal owners but if their share of the loan is in the ratio of 60:40, the tax benefits would be shared in that proportion. Tax experts suggest that you have to get a break-up of the share of the loan on a stamp paper at the beginning itself to avoid tax complications.

Each co-borrower can claim tax benefits

The overall tax deduction for a single borrower is Rs 1,50,000. This deduction would apply to each borrower taking the total possible deduction to Rs 3 lakh. Consider a couple which jointly owns property worth Rs 25 lakh with a loan share of 50:50.

If this couple pays Rs 1,50,000 as the interest and Rs 50,000 as principal, each can claim Rs 75,000 and Rs 25,000 as interest and principal deduction. It is advisable for you to lay down the share of the property and other loan details on a stamp paper for tax purpose, say tax experts.

Each needs a copy of the borrower certificate

Every borrower has to provide a copy of the borrower certificate to claim their respective tax relief. At the outset, the co-borrowers should enter into a simple agreement with the spouse on a Rs 100 stamp paper. This agreement should basically contain the share of the ownership along with that of the home loan availed by the couple. You need two copies of the certificate from the HFC and each of you can submit copies of the certificates along with a copy of the agreement signed between the two of you, say our tax experts. They, however, point out that there are no clear guidelines to this effect. Hence, it is possible for either of the borrower to miss out on the tax rebate. In such cases, they can claim it as a refund while filing tax returns.

Better to share payment of installments

A couple cannot pay two cheques for servicing the same EMI, i.e., EMI of the same month. An HFC cannot accept two cheques, as the internal systems do not support this. One viable option is to service the EMI from a joint account of the co-borrowers. The second option is to share the number of instalments. So, for example, eight cheques in a year could be issued from the husband’s account while the wife could issue the balance.

Another option is that one spouse pays off the instalments and seeks reimbursement from the partner. However, tax experts say that this process could get highly cumbersome both for the borrowers and the HFC.

Can one claim all benefits if spouse is not earning?

This is a relevant question, especially if one of the co-owners does not have any income. In such a case, the other co-owner should enter into an agreement with the spouse. The agreement should state that the entire repayment is met only by one borrower’s income. This would ensure you have 100% beneficial home ownership and consequently you can enjoy all tax benefits applicable to a single borrower.

It’s never too late for paperwork

What if the loan has already been taken without the above mentioned groundwork or if you want to change the loan share further down the line. You can still figure out the ownership share and the share of the loan between the two of you. But, this can have stamp duty implications. This also applies to those couples where the wife starts working after a year or later from the date of repayment. However, our tax experts recommend that co-borrowers should not keep changing the share of the loan every now and then. This can be viewed as a tax avoidance device

Make Money & Save On Tax

Except for Equity Linked Savings Schemes (ELSS), all tax saving investments are fixed return. It is interesting to see how in the peak of a bull run, fixed return investments are scorned by investors. Why park your money in a place that gives you a meagre return when the bulls are galloping ahead to give you 60 per cent per annum?

Go back to the five-year period from 1998 to 2002. The Sensex rose wildly and then fell to almost the same level. During these five years, your money would have stagnated in the stock market. If, instead, you had invested in a fixed deposit where you were earning 11 per cent or 12 per cent per annum (which was the rate then), you would have seen your money go up by about 75 per cent.

However lucrative the stock market, it is risky. So in every portfolio it makes sense to allocate some amount of money to fixed return instruments. And, if you can avail of the tax benefit while doing so, so much the better.

Five-Year Bank Deposits
Lock-in period: Minimum 5 years
Safety: High
Instrument: Fixed return
Annual return: Depends on market interest rates
Limit: None

This has been the latest addition to Section 80C. And, for those who love depositing money in the local bank, this one is a real boon. But do make careful note that any deposit with a tenure of less than five years will not be valid for the tax benefit.

As of now, you can expect around 8 per cent on such a deposit. Senior citizens will get 0.5 or 1 per cent more. So while this option scores high on convenience and safety, the hitch is that interest earned on bank deposits is taxed.

Public Provident Fund
Lock-in period: 15 years
Safety: Highest
Instrument: Fixed return
Annual return: 8%
Limit: Rs 500 (min) to Rs 70,000 (max) per FY

Though its interest rate has dropped from 12 per cent to 8 per cent per annum, it is still the darling of the tax saving instruments.

To add to its sheen, it also boasts of the exempt-exempt-exempt criteria, popularly referred to as EEE. What this means is that there is a tax exemption on contributions (when you deposit money), tax exemption on interest earned and tax exemption on withdrawals.

It can't get better than this though it can certainly get worse. In the future, the taxation methodology would shift to EET -- exempt-exempt-taxed -- which means that the withdrawals would be taxed.

National Savings Certificate
Lock-in period: 6 years
Safety: Highest
Instrument: Fixed return
Annual return: 8%
Limit: Rs 100 onwards. No upper limit

On the face of it, this one is identical to the PPF but with a lower tenure. While NSC offers the same interest rate of 8 per cent per annum, it is computed on a half-yearly basis, while PPF on an annual basis. On this point NSC scores.

Let's say on April 1, 2006, you invest Rs 30,000 in both, PPF and NSC. A year down the road, you would have Rs 32,400 in your PPF account but Rs 32,448 in your NSC. As the years go by, the difference becomes all the more pronounced.

But this benefit is nullified when you take the tax benefit of PPF into account. The interest you earn on NSC is taxed but is also eligible for a deduction under Section 80C.

Generally, it is advisable to declare accrued interest on NSC on a yearly basis. So, over the period of six years, you could declare the interest income for each year. In such a case, it does not amount to a huge sum. If the above does not appeal to you, then you can claim the entire amount in the year of maturity under Section 80C.

While PPF is an ongoing account, NSC is a one-time investment available in denominations of Rs 100, Rs 500, Rs 1,000, Rs 5,000 and Rs 10,000.

Employees' Provident Fund
Lock-in period: Dependent on the employment
Safety: Highest
Instrument: Fixed return
Annual return: 8.5%
Limit: 12% of monthly salary with employee given the option to increase contribution

The EPF is a retirement benefit scheme available to salaried employees. Under this scheme, a stipulated amount decided by the government (currently 12 per cent) is deducted from the employee's salary and contributed towards the fund with the employer making an equal contribution.

The flexibility exists for an employee to contribute more than the stipulated amount if the scheme allows for it. However, the employer is under no obligation to increase his contribution. Let's say the employee decides that 15 per cent of his salary must be deducted towards the EPF. In this case, the employer is not obligated to pay any contribution over and above the amount as stipulated, which is 12 per cent.

The amount accumulated in the PF is paid at the time of retirement or resignation. If you have worked continuously for a period of five years, the withdrawal of PF is not taxed.

PF can be transferred from one company to the other if one changes jobs. Even if you have not worked for at least five years but are transferring the PF to the new employer, it is not taxed. What's more, the tenure of employment with the new employer is included in computing the total of five years.

The message: If you withdraw it before completion of five years, you pay tax. Unless your employment is terminated due to ill-health.

Infrastructure Bonds
Lock-in period: Dependent on the bond, three years minimum
Safety: High
Instrument: Fixed return
Annual return: Depends on current market interest rates
Limit: None

The party is over for these. At one time, it was mandatory to invest in them. And financial institutions like ICICI and IDBI garnered phenomenal amounts of money due to this stipulation. Now that the investor has the flexibility to bypass this investment, this is exactly what is being done. And the financial institutions too have not been coming out with issues.

Of course, if you are very risk averse and want your money back as quickly as possible, this one seems to be the only tax saving option suited to both those requirements. Provided of course, the financial institutions do come out with an issue.

Sensex fall is rather a boon in disguise

The three-day continuous fall, a 984 point correction in the benchmark index – Sensex may not be all that bad for the small retail investors. It’s rather a boon in disguise. Here’s why?

December is the month when a lot of small retail investors start their tax planning. With the current 7% plus correction, many equity linked tax savings instruments such as equity linked savings schemes (ELSS) and unit linked insurance plans (ULIPs) have seen massive correction in their net asset values (NAVs).

In many of these funds, the correction in NAV is more than 7%. This is because, these funds invest in the broader market and not just the benchmark indices. And since the second rung (small and mid cap) stocks have fallen much higher than the benchmark indices, NAVs for both ELSS and ULIP schemes have plunged more than 7%.

So suddenly ELSS and ULIPs might see a lot of inflows. Already domestic institutions are sitting on plies of cash, which might start finding its way into the equity market after the current correction.

Tax payout can be cut down by investing into 80C investment vehicles and investments up to Rs 1 lakh in 80C eligible instruments qualify for the same. Assuming a flat 30% tax rate, you can save nearly Rs 30,000 in taxes per annum by investing into 80C instruments.

There are seven investment categories where you can invest to save taxes – provident fund, PPF (public provident fund), NSC (national savings certificate), infrastructure bonds, pension plans, ULIPs (unit linked insurance policies) and ELSS (equity linked savings schemes). But, with a marked rise in the equity market, many small retail investors are being led to invest into the equity linked savings option in order to save taxes.