Tax Saving Strategy

Assessment Year 2002-2003

B.Anand,Financial Consultant

There are various provisions in the Income Tax Act to save tax payable. We have shown below that the scheme one should opt for would depend on the person's income and the tax bracket he is in. In other words investing in Jeevan Suraksha may result in greater savings for one person while investing in Public Provident Fund (PPF) may result in greater tax saving for another person. The tax saving strategy has been discussed below after giving a brief description of the various options.

Under the Indian income tax regulations, a policyholder can avail of tax exemption on insurance schemes. The following are the important tax provisions applicable to LIC policyholders;

Section 88:

Under Section 88 of IT Act, an individual can claim rebate of 20% on LIC premium paid on his/her life, his/her children including adult children. The rebate is deductible from the tax payable by the individual/HUF.

Other Plans which participate in rebate under Section 88 are:

1. Contribution made by an individual for participating in the Unit linked insurance plan of UTI.

2. Contribution made by an individual for participating in the Unit linked insurance plan of LIC of India (Dhanaraksha).

3. Contribution to effect or keep in force a notified annuity plan of LIC of India (Jeevan Dhara and Jeevan Akshay).

The total amount of investment in the form of LIC premium and other specified investment like PPF, NSC, etc. is restricted to Rs. 60000/- per annum. This means that a person can save an amount of Rs. 12000 (20% of Rs. 60,000) on tax payable , by investing in Insurance plans.

Section 80CCC:

An individual can invest in the Jeevan Suraksha Plan of LIC of India, to avail a deduction of Rs. 10000/- from his gross total income in order the arrive at the net income. This is of great advantage to those people who are on the verge of falling into a higher tax slab. Since the deduction is made on gross total income, a person can invest in Jeevan Suraksha policy and reduce his net taxable income .

Section 80D:

Under this section, the insurance premium paid on a Mediclaim Policy taken on the health of the tax payer and/or the spouse, dependant parents or dependant children of the tax payer is deductible upto a maximum limit of Rs.10,000/- from the net income .

Section 80DD:

Under section 80DD a deduction of Rs 40000/- is allowed from gross total income when a contribution is made or deposit is made with LIC for the maintenance of a handicapped dependent.

In addition to the above plans, any sum received under LIC policy including bonus etc. is non-taxable.

Strategy to save Tax:

From tax saving point of view, the suitability of a scheme depends on which income tax slab one is in.

Tax Slabs Rate of Tax in the slab After adding surcharge

Upto 50,000 0% 0%
50,000 to 60,000 10% 10.2%
60,000 to 150,000 20% 20.4%
1,50,000 and above 30% 30.6%

� For a person in the highest slab it is advantageous to first invest Rs. 10,000 in Jeevan Suraksha and another Rs.10,000 in Mediclaim policy.

� For a person in 20.4% slab, the tax saving is same whether he invests in the above two schemes or in any other LIC scheme or in PPF.

� For a person in 10% slab, the tax saving is only 10% if a person invests in Jeevan Suraksha or Mediclaim. This is because the income is deducted for tax calculation purpose. But if the person invests in other LIC schemes, the tax rebate of 20% is given. By including the surcharge, the real savings on tax would be 22% of the amount invested. For tax saving purpose, LIC schemes (other than Jeevan Suraksha or Mediclaim of GIC) are suitable.

� Jeevan Suraksha or Mediclaim is also suitable for persons who fall in higher tax slabs by marginal amounts. By investing in these schemes it may be possible to bring the net income to a lower slab. This will result in the surcharge rate going down on the tax payable.

Infrastructure bonds:

If one has exhausted all options to save tax through LIC schemes, he also has the option to invest in Infrastructure Bonds and save upto Rs. 4,000 by investing Rs. 20,000.

Income from these investments:

The income from almost all the investments made is taxable in the future years in which it arises. For example the interest paid on NSC is taxable even though the investment made in NSC results in tax saving. Similarly interest on all bank deposits and bonds are taxable. So, the real interest works out to be low after paying tax on the interest. But the income arising out of LIC schemes like maturity benefits, bonus are not taxable(However annuities received under Jeevan Suraksha, Jeevan Dhara and Jeevan Akshay plans are taxable). Other investment is PPF, which gives similar advantage. The interest on PPF is not taxable.

National Savings Certificate (VIII issue)

As far as tax-savers go, the National Savings Certificate is second on the popularity charts, but that isn�t enough reason for you to go out and buy them.

Who can subscribe? Individuals and Hindu Undivided Families (HUFs). In the case of individuals, a certificate can be bought by an adult individual (single holder type) or jointly by two adults (joint holder type). A certificate can also be purchased on behalf of minor children.

Where can you apply? All departmental post offices authorised to transact savings bank business.

Nomination. This facility is available in all cases, except in the case of certificates purchased on behalf of the minor. In case the holder dies without nominating anyone, the legal heirs get up to Rs 20,000 even in the absence of a �letter of administration� or a succession certificate.

Is it transferable? Yes, but only after a year from the date the certificate was bought and under specific circumstances -- such as transfer to a near relative, to an heir if the holder dies or under a court order. An application has to be made out to get the transfer registered at a post office.

Maturity period and return. An NSC certificate matures six years from the date it was bought. The rate of interest it earns is 11 per cent per annum.

Withdrawal. A certificate can be encashed on maturity at the post office at which it is registered or at any other post office in the country. Premature encashment (any time before 6 years) is allowed under specific circumstances like the death of the holder or a court order.

Tax benefits. The amount invested in the NSC-VII issue qualifies for a tax rebate at 20 per cent (25 per cent in the case of authors and actors) under Section 88. The interest that accrues qualifies for an exemption up to a maximum limit of Rs 9,000 under Section 80L. The interest that accrues during the year is deemed reinvested (except in the last year) and qualifies for a rebate under Section 88.

NSC scorecard

Risk Low
Returns Average
Flexibility Good
Liquidity Medium
Other tax benefits Average

Pluses

* The interest that accrues is eligible for a deduction of up to Rs 9,000 from your taxable income. In other words, the interest that accrues (and is not received) is exempt from income tax up to Rs 9,000.
* The interest that accrues is automatically reinvested and is eligible for rebate of 20 per cent. This means, if you invest Rs 60,000 in a year you get a 20 per cent rebate of Rs 9,000. The interest that accrues for the year (Rs 6,600) is automatically reinvested the next year. Which means, you only need invest Rs 53,400 (Rs 60,000 minus Rs 6,600) the next year to avail of the maximum rebate of Rs 9,000.
* You can pledge NSCs with banks and other lending institutions to get a loan of 75 per cent of the value of the certificates. This is particularly useful for contractors and other people who regularly need loans against security.
* The lock-in period is for six years only.

Minuses

* The post-tax returns are lower than that offered by the Public Provident Fund (PPF) and infrastructure bonds.
* Premature withdrawals are not allowed.
* Interest income is subject to a maximum exemption of Rs 9,000; interest income in excess of Rs 9,000 is taxable.

What should you do?

Buy NSCs only if you need to pledge them to a bank/lending institution for a loan. This is because NSCs will continue to earn interest for you at a rate higher than the rate earned by bank fixed deposits. If you don�t need a loan, PPF and infrastructure bonds are a better investment option.

What is a Mutual Fund?

Mutual Funds are collective investment vehicles that pool together the funds of a number of investors to invest on their behalf in order to achieve a common objective. They invest in a wide spectrum of investment avenues like Equities, Debentures, Bonds, Non- Convertible Debentures, Government Securities, T-bills, CPs, REPOs, etc., depending upon the nature of the scheme.

What are the advantages of Mutual Funds?

* Diversification of risk
* Liquidity - proceeds will be received within 4 -5 business days.
* Tax Benefits
* Transparency - Daily NAV and Regular Portfolio Disclosure
* Professional management of funds
* In-house research on markets, industry and company.
* Regulated by regulators like SEBI and AMFI.
* Wide array of schemes to match your risk profile and investment horizon
* Systematic Investment/Withdrawal/Transfer Plans

Who can invest in Mutual Funds?

* Individuals
* Karta of HUF
* Minors (through parent/legal guardian)
* Companies, Body Corporates,
* PSUs
* Religious and Charitable Trusts (subject to necessary approvals)
* Banks & Financial Institutions
* NRIs

What are the tax benefits I am going to get?

* Long Term Capital Gains tax concession is available on profit due to appreciation in the value of units of Mutual Fund (u/s 112 of Income Tax Act, 1961).
* Investment in Equity Linked Savings Scheme (ELSS) of UTI and other Mutual Funds, up to a maximum of Rs.10,000 will be eligible for tax rebate u/s 88 of Income Tax Act, 1961.
* Investment by an Individual in any notified pension fund set up by a notified Mutual Fund or UTI will be eligible for tax rebate u/s 88 of Income Tax Act, 1961
* Unit Holders are not liable to any Wealth Tax.
* Gifts of Units, purchased under the Scheme, would be exempted from Gift Tax.

Why should I invest Through Vysya Bank Ltd ?

* Customized services - VBL provides you with the current information and helps you in making investment decision in order to achieve your financial goals and objectives after taking into account your risk tolerance, returns expectation, liquidity and investment horizon.
* Portfolio Analysis - by providing you with the latest Fund Fact Sheet.
* Regular update of your portfolio - VBL continuously monitors your portfolio and provides you with the returns, market value, and the latest performance of the portfolio quarterly.
* Appraisal of your portfolio - VBL conducts regular reviews of your portfolio and churns the same once in six months or as and when it requires, ensuring that your portfolio continues to provide optimal results for you.
* Other services - VBL assists you in filling up the appropriate application, arrange to send your documents to AMC, follow-up with the fund in case of delay or non-receipt of account statement by you and also undertake your redemption requests

Mutual Funds we market:

1. Alliance Capital

12. Kotak Mahindra

2. Birla Sun Life

13. L I C MF

3. Cholamandalam

14. Prudential ICICI MF

4. DSP Merrill Lynch MF

15. Reliance Mutual Fund

5. Dundee Mutual Fund

16. SBI Mutual Fund

6. Franklin Templeton Investments

17. Sun F & C

7. HDFC Mutual Fund

18. Standard Chartered AMC

8. IDBI Principal

19. Sundaram Newton

9. IL & FS MF

20. Unit Trust of India

10. ING Savings Trust

21. Zurich India

11. JM Mutual Fund

For Salaried Employees

The taxman loves dates and deadlines. Forget to keep a date with him, and he'll make you pay for it -- sometimes through your nose. If you are a salaried individual, these are the dates you must remember.

March 31: the end of the financial year

* The last date for making your investments in tax-saving instruments such as the Public Provident Fund (PPF) and the National Savings Certificate (NSC) that let you claim a rebate under Section 88 of the Income Tax Act. Tip: you get a rebate of 20 per cent on investments of up to Rs 80,000 in tax-saving instruments such as PPF, NSCs and the National Savings Scheme (NSS), provided you invest at least Rs 20,000 (of the Rs 80,000) in infrastructure bonds offered by ICICI and IDBI. This translates into a rebate of Rs 16,000 (20 per cent) on an investment of Rs 80,000.
* March 31 is also the last date for you to submit to your employer your rent receipt and bills for reimbursement of medical and conveyance allowances.
* If you're about to sell long-term capital assets, you should hold it. If you sell them even a day later, on April 1, you'll get the benefit of indexation for the next year. This means your capital gains will be lower, and you'll pay less tax.

April 1: the new financial year begins

* For the taxman, April 1 (and not January 1) is the beginning of the new year. Therefore, income earned (whether or not received) on or after this date will be taxed in the current year. You must factor in your salary increment for the new financial year while planning your tax-saving investments.

April 30: deadline for getting your TDS certificate

* By now you should have received from your employer a certificate detailing the tax deducted at source (TDS) on your income for the year. Form 16, as it is called, is an important document, so if you haven't got it, ask for it. While filing your tax returns, you must attach Form 16 (in original) as proof that your employer has deducted tax at source.
* Give your employer an estimate of the tax-saving investments you plan to make during the year (April to March), so it can factor in the rebate while making the monthly deductions. Otherwise, your employer may deduct more tax than you're required to pay, and you'd have to claim a refund from the income tax department. That invariably involves a bit of a runaround and agonising delays and encounters with officialdom. Best avoided.

July 31/October 31: deadline for filing returns

* One more of those big dates � the deadline for filing your tax returns. If your total taxable income for the relevant financial year exceeds the maximum exemption limit (Which is Rs 50,000 for individuals for the current financial year), then you need to file your return of income before the due date.

July 31 is your deadline for filling return of income. However, if your total taxable income does not exceed the maximum exemption limit but are covered under the one-by-six scheme, the last date for filling return is October 31 of the relevant assessment year.

Therefore, first find out if you need to file tax returns (chances are that you will need to). And if you want to know more about the hows and whys of filing tax returns, click here. To find out which is the right return form for you, click here. Download the appropriate form and take it from there. (The Saral form has made filing returns easier than ever before.) But remember that you must have paid all your taxes before you file your returns.
* Your due date for filing your income tax return is also your due date for filing your wealth tax return.

September 15, December 15 and March 15: advance tax payment schedule

* The taxman wants you to pay your taxes in instalments through the year, not in a lumpsum at year-end. If your salary is your only source of income, chances are your employer is already deducting advance tax at source. But if you have income from other sources, you may need to pay advance tax in instalments. For instance, if your total tax liability for the year on income from salary, house property, capital gains or other sources is Rs 10,000, you should pay Rs 3,000 in advance tax by September 15, an additional Rs 3,000 by December 15, and the balance Rs 4,000 by March 15. While computing your advance tax liability, you must factor in the tax deducted at source by your employer (and anyone else who made payments to you during the year).

For Self-employed Individuals

The taxman loves dates and deadlines. Forget to keep a date with him, and he�ll make you pay for it -- sometimes through your nose. If you are a self-employed individual, these are the dates you must remember.

March 31: the end of the financial year

* The last date for making your investments in tax-saving instruments such as the Public Provident Fund (PPF) and the National Savings Certificate (NSC) that let you claim a rebate under Section 88 of the Income Tax Act. Tip: you get a rebate of 20 per cent on investments of up to Rs 80,000 in tax-saving instruments such as PPF, NSCs and the National Savings Scheme (NSS), provided you invest at least Rs 20,000 (of the Rs 80,000) in infrastructure bonds offered by ICICI and IDBI. Starting 2001-2002, this investment limit stands enhanced to Rs 80,000, subject to a minimum investment of Rs 20,000 in infrastructure bonds offered by ICICI and IDBI. This translates into a rebate of Rs 16,000 (20 per cent) on an investment of Rs 80,000.
* If you're about to sell long-term capital assets, you should hold it. If you sell them even a day later, on April 1, you'll get the benefit of indexation for the next year. This means your capital gains will be lower, and you'll pay less tax.

April 1: the new financial year begins

* For the taxman, April 1 (and not January 1) is the beginning of the new year. Therefore, income earned (whether or not received) on or after this date will be taxed in the current year. You will also have to factor in the extra income you expect to receive during the new financial year to plan your tax-saving investments.

July 31/October 31: deadline for filing returns

July 31 is your deadline for filling return of income. However, if you are a working partner of a firm whose accounts are required to be audited under the Income tax Act or under any other law, or if your total taxable income does not exceed the maximum exemption limit but are covered under the one-by-six scheme, the last date for filling return is October 31 of the relevant assessment year.

* Your due date for filing your income tax return is also your due date for filing your wealth tax return.

September 15, December 15 and March 15: advance tax payment schedule

* The taxman wants you to pay your taxes in instalments through the year, not in a lumpsum at year-end. If you have income from various sources, you may need to pay advance tax in instalments. For instance, if your total tax liability for the year on income from business or profession, house property, capital gains or other sources is Rs 10,000, you should pay upto Rs 3,000 in advance tax by September 15, upto Rs 6,000 (including the earlier instalment) by December 15, and upto Rs 10,000 (including the earlier instalments) by March 15. While computing your advance tax liability, you must factor in the tax deducted at source on payments to you during the year).

Hosted by www.Geocities.ws