Taxation

How fringe benefits can help you save tax

2008-09-06T18:18:00.000-07:00

Is there a way your employer can help you in saving tax on fringe benefits that you get? If yes, then how can you go about it?

How can you save tax using house rent allowance, interest and principal paid on your home loan and letting out property that you own?

In a chat with readers on April 23, Get Ahead tax expert Mahesh Padmanabhan answered these and many more queries related to tax claims on home loans, HRA benefits, capital gains tax and how to plan and invest your money in 2008-09?

For those of you who missed the chat, here is the transcript.

DK asked, can i take advantage on Home loan as well as Rent

Mahesh Padmanabhan answers, You can take the benefit of HRA as well as home loan if you are actually staying in a rented premises. However, you would need to note that if your owned house is in the same city then you need to have strong reason to be staying in a rented premises. Employment requirement is one such reason. If your stay in a rented premise is merely to meet your convenience then such reason would not hold good.

pramod sahoo asked, Sir, i m a central govt employee. This year my salary will be around 5.5 lakh. How can i be able to save tax besides the maximum limit of 1 lakh savings. Can I gift some amount to any relatives and get benefited from it. I want to make part payment of my home loan, is it the right decision taking into account i m in the 20% income tax bracket.

Mahesh Padmanabhan answers, Gifting does not entitle the donor to any tax deduction. In case you you have your section 80C investment quota of Rs. 1 Lakh covered then you may not be specifically be eligible to any additional deduction for the part payment of home loan. But considering the rising interest rates, it make sense financially to pre-pay atleast some portion of your loan.

ak asked, There is a article on Rediff to pay Zero Tax on Rs. 13.10 Lac income by creating an HUF. Can you please provide some details on this and if this is really workable option for salaried class?

Mahesh Padmanabhan answers, HUF can be created by any hindu family. It works as a separate taxable entity and hence if you are in the maximum tax bracket then it might make sense to push some income into the HUF. Having said this you need to note that it is not as easy as it is made out. The principal contribution has to be managed well as it might otherwise be clubbed with your own income. You would need a detailed counseling session with your tax consultant before you go about creating a HUF.

sanjeev asked, I WORKING IN JAIPUR [Images], i am staying with my parent alonr AND MY FAMILY STAYING IN Mumbai in the house taken by me on Rent, i am paying rent of Rs 10000 pm by cheque and agreement is there. can i take benefit of HRA exemption for this house?

Mahesh Padmanabhan answers, Though your question is unclear, based on my understanding, i am answering the query. In case you are staying in your parent's house in Jaipur and paying rent to your father then such payment qualifies for HRA deduction. However, if you are referring to the rented house in Mumbai for your family while you are staying in Jaipur on account of your employment then you would not be eligible for any deduction for the Mumbai rented house.

Samrat asked, Hi there ... I have 50K that I got as bonus and can invest right now. I am not too adventurous and would like to invest in a safe plan even though the returns are not very high. Lock in pd max of 5 year, what plan shud be best for me and how much return do I expect?

Mahesh Padmanabhan answers, In case you are risk averse, then you should either go for term deposits with banks or in MF FMPs. However, as your investment horizon is 5 years, you could also look at diversified equity MFs.

KKA asked, Hello Mahesh, Good Afternoon!! I am currently residing in a rented house and am now planning to buy a flat. I would not be moving into the new flat that i'm buying and would be renting it out. I wanted to know if i can claim tax excemption on home loan for the new flat plus claim HRA for the current residing house.

Mahesh Padmanabhan answers, If you are actually renting out the new house then you would be eligible to claim the entire amount of home loan interest as deduction in addition to the standard deduction of 30%. Moreover, if you are actually staying in a rented house then you could claim HRA deduction also.

PKK asked, WHILE SUBMITTING ITR2, PLEASE CLARIFY THAT SHOULD WE FILL UP THE INTEREST RECEIVED IN PPF ACCOUNT IN "SCHEDULE EI" ?

Mahesh Padmanabhan answers, The interest credited for the year as mentioned in your PPF passbook would need to be mentioned here. Please note that this is exempt from tax and appears only as a disclosure.

Gopi asked, Hello Mahesh,I would like to purchase a land for constructing a house.Could you please tell me whether can I get tax saving either in purchase or in construction or both

Mahesh Padmanabhan answers, You would get the home loan benefit for the construction of the house. But in case of interest on loan for purchase of land you would not get any deduction.

u asked, hello my income is 144000yearhow i t6ax save?

Mahesh Padmanabhan answers, Your income is below the taxable limit and hence you do not need to save from the perspective of reducing tax. However, from the perspective of general investing you could opt for any of the available investment options such as PPF, NSC, Term deposits, Mutual Funds etc.

avinash asked, hello sie i want the information about different types of funds or schemes useful for tax saving plz reply me?

Mahesh Padmanabhan answers, Tax saving MFs are more popularly known as Equity Linked Savings Scheme (ELSS) MFs. You would need to check for a fund which is eleigible for such tax deduction. eg. of such funds are SBI [Get Quote] Magnum Taxgain Fund, HDFC [Get Quote] Tax Saver Fund, Birla Sunlife Tax relief Fund.

SUNIL asked, I AM A SALARIED PERSON. I'VE JUST BOOKED A FLAT WHICH IS UNDER CONSTRUCTION AND I'VE TAKEN A HOUSING LOAN OF RS. 27,50,000/-. I WILL GET POSSESSION OF THE IN JANUARY, 2010. PRESENTLY I AM STAYING IN A RENTED FLAT. CAN I GET INCOME TAX REBATE ON BOTH RENT AND EMI AND INTEREST OF HOUSING LOAN.

Mahesh Padmanabhan answers, As you are staying in a rented premise, you can claim the benefit of HRA deduction but in case of the property that you have purchased, as the same is under construction you can claim the home loan benefit only after the construction is completed.

sameer asked, I want to purchase a commercial property by taking loan from my relative. I am also planning to pay my relative an interest . Will this interest paid qualify for tax deduction under interest on housing loan section?

Mahesh Padmanabhan answers, You would get the benefit of such interest paid to your relative. However, to be very clear, you would be advised to have strong documentation. Which means that you would need to execute an agreement for the loan with the terms of repayment and interest clearly mentioned therein.

krnmeena asked, i m goverment sarvant. My income sources are sahre trading, salary, and mutual fund divident. in finacial year, my short term gain is negative in share trading if my total income (1).from salary:160000 (2).from share:-5000 (3).divident:1000. (4).Interast:300. (5). my saving is 18000 under 80c. than what is my total taxable income? what ITR from i should fill for tax return. thanks.

Mahesh Padmanabhan answers, In case these details pertain to financial year 2007-08 then as your taxable income is in excess of Rs. 1.1 lakhs, you would be needed to file your returns in ITR-2. In case this is for the FY 2008-09, then as your taxable income is below the taxable income of Rs. 1.5 lakhs, you would not be needed to file your returns.

Prasad_js asked, Hello Sir, This is JS Prasad working in Mumbai. I am getting CTC of 10 lacs (I ma new to Mumbai - so I am not sure where to buy property to save tax on Home loans). Want to know details on Investments. Also I need to know about the tax advantages under section 80 G as I am planning to donate some money to a organisation which is recognized. Thanks.

Mahesh Padmanabhan answers, Though you would get tax breaks for investing in home using a loan, you would need to note that the current property rates are actually overvalued and might come down in the coming few months. Hence it would be wise not to go in for such investment option as of now. In case of deduction on account of donations, you would need to note that only some specified donations qualify for 100% deduction but for most it would be 50% of the amount donated. In some cases there is a restriction of such deduction to the extent of 10% of adjusted gross total income.

Ajay asked, Good Afternoon Mahesh, Hope you are doing Great!!! What is the maximum amount per annum non-taxable for LEAVE TRAVEL ASSISTANCE and MEDCIAL ALLOWANCE?

Mahesh Padmanabhan answers, There is no specific tax limitation for LTA apart from the frequency restriction of once in 2 years or twice in a block of 3 years. This would however, be subject to the salary structure defined by your employer. In case of deduction of reimbursement of medical expenses the limitation is Rs. 15,000 per annum.

ansar asked, Hollo Sir Pls define fringe benifit tax andt tax burden in the hands of employee.

Mahesh Padmanabhan answers, FBT (excepting on ESOPs) is theoretically the liability of the employer. However, in many cases the employer incorporates FBT liable expense reimbursement component into the salary structure of employees to facilitate lower tax to the employee. In such case, the employer might mark this amount as a cost and include it into the CTC of the employee.

agpandey asked, sir is there any benefit in purchasing agricultural land from tax point of view

Mahesh Padmanabhan answers, Agricultural income per se is not taxable. Otherwise there is no specific deduction available for purchase of agricultural land.

Brijesh asked, Hi, What is the procedure for filing e-returns?

Mahesh Padmanabhan answers, You could visit the income tax site www.incometaxindiaefiling.gov.in and download the excel utility files for completion and then uploading.

Rajesh asked, What would be the upper limit for considering the Interest Amount on Housing Loan when House is Let out?

Mahesh Padmanabhan answers, There is no upper limit for deduction of housing loan interest when the property is let out.

nd asked, sir, can the loss against one share be settled against the profit of another while calculating short term capital gain?

Mahesh Padmanabhan answers, Yes it can be adjusted against the profit on sale of other shares.

Mahesh Padmanabhan says, Dear friends, it is time for us to sign off. We thank you for your participation and hope to back to answer more queries next time. Team RelaxwithTax

6 Top Income Tax Fallacies Disproved

2008-09-06T11:14:00.001-07:00

Death and taxes are inevitable: no wonder one tries delaying both as much as possible. But more significant are the misconceptions that people harbour about some key aspects of tax

Every year, Mohit Gupta promises me that the next time around, he will file his income tax returns much before the last day. Of course, when it actually comes to it, my office has to start calling Gupta from early July to remind him of his pending returns. It then gets into a last-minute rush featuring papers to be searched for, the shock of finding a higher tax to be paid and, to make matters easier, some papers missing.

Over the last 25 years that I have been in the profession, not a year has passed by when some client or the other has not rushed in at the last hour to get his tax returns filed. Gupta is not a case in isolation. They all solemnly promise that it will not happen the next year, but I am yet to witness a last day of filing when my office does not resemble a wholesale market buzzing with people with files, folders and the works waiting for their turn.

The faint of heart would baulk at filing over 250 returns on the last day, as we did this year. And, though my office staff had the schoolboy-like excitement to manage it all,
I was a little uneasy till it got over. I got unnerved at the thought of “what if we are unable to file them all?” and the problems my clients would face afterwards.

While the real personal income tax action heats up in March, I face the impact of it in July. Despite discussions on salary structures, tax optimisation and efficient tax management, I still get to interact with many people with very serious doubts. The most common question I face is: why should I file any return when my employer has already deducted TDS and issued the Form 16 to me? Such innocent questions make me sympathise with people’s inability to understand the most common aspects of their personal taxation duties.

For instance, technology, in the past two years, has emerged as a great leveller. Since the assessment year 2007-08, one can file the returns and taxes online. Terrifyingly long queues at special collection counters are now passe, though some still prefer the manual procedure out of sheer habit. With initiatives by the government and organisations, filing will be done more from home in the future.

In the first year of e-filing, I found the system was slow with issues related to digital signatures and associated costs. But many people are now finding this system convenient to file returns at the last hour. After all, the deadline is no longer 5 pm: it’s at midnight.

But more than the tax filing process, on the last day I encounter tax payers’ doubts and misconceptions. Many of them feel cheated that their assumptions about post-tax incomes were inaccurate. Some even start doubting their negotiation skills. There are others who get disenchanted with the taxation system and start assuming that my job is to create wealth out of nowhere for them. I can only optimise tax payments for an individual. Beyond this, the individual needs to increase his or her income. I will take you through some common myths and misconceptions harboured by people I came across in July this year.

1. Valuation of perquisites.
Despite the clear guidelines and explanatory notes that I share with high-income clients, they realise rather late that their actual income and what they had fought tooth and nail for during salary negotiations, are far apart.

For instance, Rajesh Kumar, an employee with a growing consulting firm in Gurgaon, negotiated a package of Rs 24 lakh with his employers. Within the package he opted for the rent-free accommodation of Rs 3.06 lakh, which was deducted from the salary package leaving his cash annual salary at Rs 20.94 lakh. This Rs 3.06 lakh was added to his cash salary as a perquisite to calculate the taxable income. On this basis, the total tax liability of Rajesh worked out to Rs 7.24 lakh. Rajesh said he could get a better accommodation for the amount charged by his company. When I suggested he change his option to receiving of HRA and rent a house, he disagreed.

When I calculated and showed his tax liability, from the HRA plus rent route, he fell off his chair. The tax saving was close to Rs 33,000 and he could move to an accommodation of his choice closer to his workplace, thus saving on conveyance and time. The switching, however, may not make much sense if the accommodation outside was more expensive than the perk’s value. Similarly, Niranjan Jha got a cash salary of Rs 22 lakh and a perk value of Rs 3 lakh for interest-free home loan. In his case, too, it would have made more sense to take the total amount as salary and rather raise a housing loan from an institution. When we got down to calculating by exercising the second option he could have saved as much as Rs 84,975 in income tax in one year and not feel obligated to his employer.

2. Multiple employments in an assessment year.
These days job-hopping is common. Even a few extra thousand rupees are tempting. For salaried employees, invariably when they change employment during a financial year, both or all the employers allow them the basic exemptions. This leads to a higher tax liability and even penalties for not paying advance tax.

This happens because of non-disclosure of details of previous income. To avoid unnecessary interest and penalty it is very important to make proper disclosures or pay advance tax. After all, why burden payment at one go, when it can be staggered through the year.

3. Interest from bank deposits.
Regardless of the balance in the savings account in a bank, some amount of interest will always accrue in the account. Since there is no basic exemption for the interest earned, one needs to pay some amount as tax on this earning from interest.

At the last minute, most assessees have to pay some amount as tax on interest income. To avoid this, one can always estimate the income on this account and ask the employer to deduct some extra tax to cover the earning or pay advance tax.

4. Repayment of home loan.
Most taxpayers believe that the deduction related to interest and repayment of principal housing loan is applicable to only one house.

It is true as far as the interest part on a self-occupied property is concerned, but for repayment of principal amount all housing loans will qualify for deduction within of course, the overall limit of Rs 1 lakh. If the other property is rented, then, of course, the entire amount of interest on loan for that property also qualifies for deduction.

5. Capital loss.
Again, most taxpayers know that they can set off the loss under the head of capital gain against the profits under the same head. But if the net result was a capital loss, many did not make it a point to disclose and carry it forward to subsequent years. If the loss is not disclosed and carried forward, next year it will not be available for setting off.

6. Mandatory disclosures.
Hardly anyone is aware of certain mandatory disclosures required to be made by assessees while filing the return. The most common are credit card payments in excess of Rs 2 lakh in a year, purchase or sale of a property worth Rs 30 lakh or more. Its also common and unintentional for taxpayers to withhold information; something that can get anyone in trouble with the IT department.

My only advice to all tax payers: do not take it as your accountant’s duty to file your returns. It is important for you to be involved with your tax filing. Make use of the accountants to make taxes work for you and understand what you are paying for and why.

About tax-saving funds and SIPs

2008-09-02T22:11:00.000-07:00

If the title of this article surprises you, we won’t hold it against you. It’s not common to find tax-planning being discussed this early in the financial year. Then again, good advice isn’t commonly available either.

we have consistently maintained that tax-planning is as much about contributing to your financial goals as it is about saving taxes. So, it shouldn’t be treated as just another activity to be taken care of in a rushed manner, at the end of the financial year. Due thought and time must be accorded to tax-planning. Hence, the need to commence the process early in the financial year.

More specifically on tax-saving funds (also referred to as Equity Linked Savings Schemes – ELSS), let’s discuss what a tax-saving fund is and find out if it differs from a regular equity fund? A tax-saving fund is an equity fund that enables the investor to claim tax benefits under Section 80C of the Income Tax Act; the amount invested is eligible for deduction from gross total income, subject to an upper limit of Rs 100,000 in a financial year. Another distinguishing feature is that unlike conventional equity funds, investments in tax-saving funds are subject to a 3-Yr lock-in. While most tend to frown at this provision, it should be welcomed. Investments in equities should be made over the long-term and the lock-in promotes the same.

Of course, being market-linked, tax-saving funds are high risk-high return investment propositions. Hence, you need to take into account your risk appetite before getting invested. This will help you determine what portion of your tax-planning portfolio (if at all) should be assigned to tax-saving funds. Typically, a risk-taking investor would hold a larger portion of his portfolio in market-linked avenues like tax-saving funds and vice-versa.

· Click here to rank tax-saving funds

Now for the part about starting off with a systematic investment plan (SIP). An SIP can help you benefit from rupee cost averaging. Simply put, a staggered investment in a tax-saving fund (running over the financial year) is likely to be exposed to market ups and downs. And by investing a fixed sum of money at regular time intervals, you stand to benefit from the downturns by way of higher number of units and a reduced average purchase cost. Also an SIP is lighter on the wallet as opposed to a lump sum investment. Hence, our view that now is as good a time as any to start off with an SIP in a tax-saving fund.

Having discussed the investment proposition offered by tax-saving funds, now let’s discuss a strategy for selecting a tax-saving fund.

1. The fund house should pass muster
We believe that a fund house should make the grade before any of its funds can be considered for investment purpose. In other words, before considering a tax-saving fund, you must scrutinise the fund house on various parameters. For instance, the fund house must be strong on investment processes and philosophy. It should pursue a process-driven investment style (as opposed to one led by a star fund manager). Then, the fund house should have an unblemished track record of having adhered to the investment mandates of its offerings at all times.

2. Opt for a flexible investment mandate
Avoid investing in tax-saving funds that have restrictive investment mandates. For instance, some tax-saving funds are positioned as mid and small cap offerings. Such funds may find themselves in a rather unenviable situation, if the mid/small cap segment hits a rough patch and large cap stocks emerge as the season’s flavour.

3. Seek diversification
It is not entirely uncommon to find a fund house’s tax-saving fund, offering the same investment proposition as the flagship equity fund from the fund house. In other words, the only differentiating factors are the tax benefits and the 3-Yr lock-in. For the sake of diversification, avoid duplication in your portfolio. Look for a tax-saving fund that has a character of its own, distinct from that of other funds in the portfolio.

4. Evaluate the fund’s performance
Evaluate the fund’s performance on the returns front over longer time frames (at least 3 years). Find out how the fund has fared vis-à-vis its benchmark index and peers. The fund’s showing over prolonged downturns should be studied as the same is an indicator of its true mettle.

Of course, there’s much more to a fund’s performance than just returns. Its performance on risk parameters like volatility control and risk-adjusted return must also be studied. Then, the fund should have adhered to its stated investment mandate at all times.

In conclusion – if your risk appetite permits investing in a tax-saving fund, now is the time to scout for one and start off an SIP.

Is tax-planning on your 'to do' list?

2008-09-02T21:50:00.000-07:00

Here’s a thought – when it comes to investing in the normal course, investors are willing to spend time, evaluate various options and meticulously plan the entire process. But when it comes to tax-planning, handling it in a rushed manner towards the end of the financial year is an acceptable proposition. While investing can be a sporadic activity, tax-planning is an annual exercise and hence can have far greater implications on one’s finances. Finally, when investments are made in designated avenues for the purpose of tax-planning, they deliver dual benefits i.e. reduce the tax liability and generate optimum returns.

Despite the obvious benefits that tax-planning offers, the apathy displayed by some investors towards it is rather surprising. Perhaps these investors continue to look at tax-planning as just another annual obligation that must be fulfilled. As a result, they haven’t fully understood the benefits that the tax-planning exercise can deliver.

Investors would do well to appreciate that tax-planning forms an integral part of their financial planning. Hence, an adequate amount of time and effort must be devoted towards the exercise.

Speaking of time, it’s important that investors commence the tax-planning activity well in advance; waiting for the last moment is certainly passé. This will give them the opportunity to thoroughly evaluate various options. And with the half-way mark of the financial year approaching, we believe it is high time investors got started.

Another popular reason for investors shying away from the tax-planning exercise is that it is perceived as being too complicated. Nothing could be farther from the truth. With good advice (read the services of a competent investment advisor) and time on hand, tax-planning is not half as difficult as it is made out to be.

For example, while tax-planning can assume many forms (i.e. Section 80D, Section 24(b)), Section 80C is the key section for the purpose of claiming tax sops because of the breadth of options it offers. Investments (like Public Provident Fund (PPF), National Savings Certificate (NSC), tax-saving fixed deposits and tax-saving mutual funds, among others) and contributions (like life insurance premium and repayment of principal on a home loan, among others) of upto Rs 100,000 per annum are eligible for deduction from gross total income. All investors need to do is follow some simple steps and the tax-planning exercise can be easily sorted out.

· Tax-planning: The ‘small savings’ way

To begin with, investors must find out how much (based on their incomes) they need to contribute towards the Section 80C kitty. Tax-advisors and chartered accountants can aid investors on this front.

Once the investment amount is known, the next step is to get a check on the ongoing investments and contributions that are eligible for tax benefits. For instance, if one has availed of a home loan, he needs to find out (from the housing finance company), what his annual contribution towards the principal repayment will be. This is important since the EMI (equated monthly installment) consists of both the principal and the interest components. The interest component is eligible for tax benefits under a different section.

Then the premium payments on existing life insurance policies must be taken into account. For salaried individuals, contributions to EPF (Employees’ Provident Fund) should be factored in; the employer will be best equipped to provide information about this. Finally, investment avenues like PPF wherein annual contributions are mandatory should also be considered. Once the investor gets a fix on the above, he will be unambiguously aware of the additional sum to be invested/contributed towards Section 80C.

Principles of financial planning like asset allocation and investing in line with one’s risk profile should kick in at this stage. For instance, risk-averse investors should ensure that a greater portion of their tax-planning portfolio is held in assured return schemes like PPF, NSC and tax-saving bonds. Conversely, risk-taking investors can have a portfolio skewed in favour of market-linked avenues like tax-saving mutual funds (also known as equity-linked saving schemes - ELSS) and unit linked insurance plans (ULIPs).

The tax-planning exercise can also throw up some ancillary benefits. For instance, it offers the opportunity to take a hard look at one’s portfolio. This might throw up some interesting observations - say the lack of or an inadequate insurance cover, or a portfolio skewed in favour of assured return schemes in a risk-taking investor’s portfolio.

As mentioned earlier, the tax-planning exercise is not half as difficult or dreary as it is made out to be. All one needs to do is be methodical, seek advice and the rest will fall into place. Finally, that it can significantly contribute to one’s finances, should be reason enough to get started at the earliest.

Section 80C, tax planning and investments

2008-07-12T19:03:00.001-07:00

Learning how to plan your taxes is a major part of choosing an investment strategy. In this article we will look at Section 80C, one of the most important provisions for investors in the tax laws.

What is Section 80C?

The government, in order to encourage savings, gives tax breaks to certain financial products as discussed in Section 80C of the Income Tax Act. These investments are often referred to as 80C investments.

Up to a limit of Rs 1 lakh, the money that you invest in these products is deductible which means that you don't have to pay income tax on it. Thus if you are in the 30 per cent tax bracket and you invest the maximum allowed you save Rs 30,000 in taxes.

There are a wide range of investments you can make to claim the Section 80C benefit. To keep things simple we will focus on two categories: Small savings schemes and ELSS (equity linked savings schemes). Other 80C products include your provident fund, the repayment of principal on your home loan and your life insurance premium.

Small savings schemes

These include the public provident fund (PPF) and National Savings Certificate (NSC). They offer a return of around 8 to 8.5 per cent which is quite low compared to typical returns in equity products. Furthermore, there is a relatively long lock-in period, 15 years for the PPF and 6 years for the NSC. Their main advantage is that they offer a guaranteed return unlike equity-based products.

Equity linked savings schemes

These are basically mutual funds which are specially created to provide tax benefits. As with regular mutual funds there is no guaranteed return and you can lose money in a period of falling stock prices as has happened in the first half of 2008. However, ELSS usually provides a higher return than small savings schemes and also a lower lock-in period of three years.

Examples of ELSS include Franklin India Taxshield and HDFC [Get Quote] Taxsaver. As with regular mutual funds, these schemes pursue a range of investment strategies: For instance, some may focus on large cap stocks while others may focus on small and mid cap stocks. It makes sense to invest in more than one scheme to diversify some of your risk.

Making a choice

How do you decide to allocate your Rs 1 lakh 80C limit? This will depend on your other financial decisions; for example whether you have taken a home loan or purchased life insurance. As to the decision between small savings schemes and ELSS two of the most important factors are your attitude to risk and inflation.

As recent months have shown so clearly, stock markets are a lot riskier than small savings schemes. However, the flip side is that riskier investments like stocks offer a higher rate of return particularly over the long run. From the perspective of a young investor who may not need most of her/his investment money till retirement it probably makes sense to tilt towards riskier assets.

The other important consideration when evaluating returns is to adjust for inflation.

In other words, if your investment generates a return of 8 per cent and inflation is 7 per cent, then your inflation-adjusted return is only one per cent. When inflation moves into double digits you are actually making a negative inflation-adjusted return, as is happening currently. This is a fundamental problem with any investment product that offers a fixed return at a time of high and rising inflation.

By contrast stocks are a better hedge against inflation especially in the long run. Though inflation increases the costs of firms it also allows them to charge a higher price to their customers thereby protecting profits to some extent. This in turn means that stock prices and equity-based products can offer better protection from inflation over a number of years though not necessarily in the short run.

What about the element of timing when it comes to equity schemes? For instance, stocks have clearly taken a pounding in the last six months. However this doesn't necessarily mean it's a bad time to invest in stocks; valuations in some companies look quite attractive now and over a three-year horizon you could see decent returns.

From the point of view of the average investor it's probably best to take timing out of the picture by following a systematic investment plan which means you invest a fixed amount every month.

Small savings schemes and ELSS each have their advantages and disadvantages. Based on your investment strategy and particularly your attitude towards risk you have to choose how much to invest in them as part of your Section 80C investments.

Deductions for stamp duty under 80C

2008-04-26T21:05:00.000-07:00

Deductions for stamp duty under 80C

T. Banusekar

Q. Will rebate under Section 80C in respect of stamp duty paid for registration of a property be available only in respect of such duty paid for acquiring a residential house or will it also be available in respect of such duty paid for acquiring a commercial property such as an office or a shop?

A. Will exemption under Section 54EC be available on capital gains arising from the transfer of a commercial property such as an office or a shop? â€" Dinesh Mittal

The deduction under Section 80C for stamp duty will be available only on purchase or construction of a residential house. No deduction can be claimed under Section 80-C in respect of the stamp duty paid for acquiring an office or a shop.

The exemption under Section 54EC would be available subject to satisfying the following conditions

The asset transferred is a long-term capital asset.

The investment is in bonds of the National Highway Authority of India or in bonds of Rural Electrification Corporation.

The bonds are redeemable after a period of 3 years.

Q. If the exemption should be claimed under Section 54EC, the investment should be made before the expiry of six months from the date of transfer of the capital asset.

A. Therefore, if a commercial property such as an office or shop is sold, the exemption under Section 54EC can be claimed subject to the satisfaction of the other conditions stated above.

You may, however, note that the maximum amount that can be invested in a financial year for claiming the exemption under Section 54EC cannot exceed Rs 50 lakh.

I have constructed three houses. Two are let out and one is self occupied.

I have taken loans for constructing all the three houses â€" two from bank and one from my employer.

Q. I am offering the rental income from the two properties let out to tax.

Will I be entitled to claim the deduction under Section 80C in respect of the principal repayment of the loan taken for all three houses or will I be eligible for the deduction only in respect of the loan taken for one of the houses?

If such deduction is available in respect of the loan taken for all three houses, can I furnish the particulars of the principal repayment to my employer, who would consider the same for the purpose of deduction of tax at source on my salary? â€" Anonymous

A. There is no prohibition on claiming the principal repayment on housing loan in respect of the loan taken for more than one house property.

You may, however, note that a loan taken from your employer will be eligible for deduction under Section 80C only if your employer is a public company or a public sector company or a university established by law or a college affiliated to such university or a local authority or a co-operative society.

Subject to this restriction, the principal repayment for all three loans, two from the bank and one from your employer would qualify for the deduction under Section 80C.

You can furnish the particulars of the principal repayment of the housing loans to your employer, who can take the same into consideration for the purpose of allowing deduction under Section 80C and in computing the tax to be deducted at source on your salary income.

You may, however, note that a maximum deduction that can be availed under Section 80C is a sum of Rs 1 lakh and that deduction under Section 80C would be available in respect of certain payments and investments, which would also include principal repayment of housing loan.

Q. Is short-term capital gains, from sales of shares, are taxable even if the total income of the assessee is less than the maximum amount not chargeable to tax? How are profits or losses from trading in options and futures taxable? If there is a net loss from such dealing in options and futures, can the same be set off against income from any other head? â€" Venu Gopal

A. The short-term capital gains, from sale of shares, will be chargeable to tax only if the income, including such gain, exceeds the maximum amount not chargeable to tax.

This would be true whether the gain is from sale of listed securities through a recognised stock exchange or gains from sale of any other capital asset.

You may note that Section 111A, which provides for a differential rate of tax on short term capital gains from transfer of listed securities through a recognised stock exchange, makes a specific provision that if the other income excluding the short-term capital gain does not exceed the maximum amount not chargeable to tax, the amount by which such other income falls short of the maximum amount not chargeable to tax would be reduced from the short-term capital gains and only the balance gets charged to tax.

This would in effect mean that if the total income, including the short-term capital gain from sale of listed securities through a recognised stock exchange, is less than the maximum amount not chargeable to tax, such short-term capital gain would not be charged to tax.

The profit or loss from dealing in options and futures would be treated as a regular business income or loss subject to satisfying the following conditions:

The transaction is carried on through a registered broker or sub-broker or by banks or mutual funds; and

The transaction is carried out electronically on screen-based systems and which is supported by a time stamp contract note, which indicates the client identity and the number allotted under the SEBI Act or the SCR Act or the Depositories Act and also gives the permanent account number of the client if the above conditions are not satisfied, the gain or loss from dealing in options and futures would be treated as speculative income or loss.

Regular business loss can be set off against income from any other head other than income under the head salary.

The balance if any after such set off can be carried forward and set off against income from business within a period of 8 assessment years immediately succeeding the assessment year in which the loss was first computed.

India tax laws need drastic reforms and changes

2008-04-06T07:09:00.000-07:00

The rotten minded babudom and politicians out of sheer old habits keep doing same foolish exercises every year and don't want to let go of rules and policies for reatining their importance and control, creating complexities,wastage of stationery and harassing tax payers.

All this nonsense must stop now. Why there should be so many rules, exemptions and calculations. Simply reduce taxes to two slabes of 15% and 10% slabs and fix tax exemption limit Rs 3.0 lac.Do away with all stupid rules and clauses.

Who are beneficiaries of all this ? The Corrupt Income tax officials, politicians who organise raids on businessmen to extract money and third rate tax consultants. The latter in many cases are merely like pimps.Same is situation of other taxes in india like service tax, excise duty,sales tax,customes etc.
India is most heavily taxed country in the world with only Rs 0.27 real worth of goods going in hands of consumer for Rs 1 spent by her.

More are tax rules more correuption. More is tax rate more evasion. The Income tax act and its rules should be in 3 pages each. Period!
The return form with tax challan should also be in one page in simple format. Why the hell advance tax is to be paid by anyone?This is like treating tax payers as criminals and that is what they become finally. Why can't I choose my own tax month once a year? Only some concessions like that to senior citizens, charity donations, handicapped persons,medical insurance,interest payment on house loans and provident fund deposit should be allowed.Scrap all other provisions,exemptions,rebates and rules.

Make it online system( With PAN) and remove corrupt and excessive staff which is failed staff.Mke PAN compulsory for all transactions above Rs 10,000 each of all typoes including restaurant and hotel bills.Politicians and babus should stop thinking about citizens as being corrupt. They themselves are corrupt and rotten and main cause of malpractices in country. Today there is no difference in government servants of any type and a good part of them are criminals, corrupt, thieves(of public funds),property abusers(cars, houses ,satff ,stationery etc)and blackmailers( extortionists of bribe from helpless citizens).
I can't understand why only 2% stamp duty is not put on property sale and why there should be capital gains and wealth tax nd at so high rate and not just 5% if at all imposed.The entire black money of more than 50 lac crores( with Indians) will come out in mainstream if these fools do what is being suggested. But they won't as they are main beneficiary of black money system.

And why women's income need to be taxed less and why farmers income has to be tax free? We are living in archaic fallacies. Tax is paid from profits so what is use of exempting income tax which comes only from profit. When some one will have income then only any company or person will pay taxes. I could never understand rebate or exemption in income tax. Of course sales tax and excise rebate can make a new venture competitive. Same way if a woman is earning less she will anyway pay less tax.

I think people should ask government to get off their necks and make taxation low, simple and brief in the country. Government should not try to tax everything and waste money and charge huige rates like 12.3 % on sservices of all types.

Government job is to ensure regulatory framework, strong judicial system to punish law breakers and create facilities for business and competition to flourish. Their attempt to control economy and businesses and retain their bossism over the citizens in name of law and power of constitution is foolish and anti social act. It must go.

The tax laws should be such that citizens are encouraged to pay taxes at modest rates and in a simple manner wiothout being harassed.The whole system, should be made computerised and expenses based.
Those hwo concentrate more wealth likie houses and property, gold and live in 5 start system must be heavily taxed to dioscourage greed and money making.
What we need is regulated market economy and socialist capitalism and not laissez fairre state of affiars presently seen in india where commodities and property prices have been increased 4-5 times in last 10 years without even doubling common man's earning.This is criminal act and sheer exploitation and treason with society who appoitn abus and politicians.In such situation people have right to refuse to pay taxes just for running this corrupt and heavy administration and to feed bonelss, cheap and corrupt babus and politicians in country.
There is no case for raising salries of babus at this time.

17 tax-free incomes for you

2008-04-03T06:49:00.000-07:00

The following are 17 important items of income, which are fully exempt from income tax and which a resident individual Indian assessee can use with profit for the purpose of tax planning.

1. Agricultural income

Under the provisions of Section 10(1) of the Income Tax Act, agricultural income is fully exempt from income tax.

However, for individuals or HUFs when agricultural income is in excess of Rs 5,000, it is aggregated with the total income for the purposes of computing tax on the total income in a manner which results into "no" tax on agricultural income but an increased income tax on the other income.

Agricultural income which fulfils the above conditions is completely exempt from tax. The manner of calculating tax on total income and agricultural income, is explained in the following illustration:

Illustration

For FY 2008-09 (assessment year 2009-10), a male individual has a total income from trading in textiles amounting to Rs 1,52,000; besides, he has earned Rs 40,000 as income from agriculture.

The income tax payable by him will be computed as under:

On the first Rs 150,000 of the taxable non-agricultural income: Nil
On the next Rs 40,000 of agricultural income (falling under 10% slab): Nil
On the next Rs 2,000 of taxable non-agricultural income @ 10 per cent: Rs 200
Income tax on aggregated income of Rs 152,000 + Rs 40,000 = Rs 192,000: Rs 200

2. Receipts from Hindu Undivided Family (HUF)

Any sum received by an individual as a member of a Hindu Undivided Family, where the said sum has been paid out of the income of the family, or, in the case of an impartible estate, where such sum has been paid out of the income of the estate belonging to the family, is completely exempt from income tax in the hands of an individual member of the family under Section 10(2).

3. Share from a partnership firm

Under the provisions of Section 10(2A), in the case of a person being a partner of a firm which is separately assessed as such, his share in the total income of the firm is completely exempt from income tax since AY 1993-94.

For this purpose, the share of a partner in the total income of a firm separately assessed as such would be an amount which bears to the total income of the firm the same share as the amount of the share in the profits of the firm in accordance with the partnership deed bears to such profits.

4. Allowance for foreign service

Any allowances or perquisites paid or allowed as such outside India by the Government to a citizen of India, rendering service outside India, are completely exempt from tax under Section 10(7). This provision can be taken advantage of by the citizens of India who are in government service so that they can accumulate tax-free perquisites and allowances received outside India.

5. Gratuities

Under the provisions of Section 10(10) of the IT Act, any death-cum-retirement gratuity of a government servant is completely exempt from income tax. However, in respect of private sector employees gratuity received on retirement or on becoming incapacitated or on termination or any gratuity received by his widow, children or dependants on his death is exempt subject to certain conditions.

The maximum amount of exemption is Rs. 3,50,000;. Of course, this is further subject to certain other limits like the one half-month's salary for each year of completed service, calculated on the basis of average salary for the 10 months immediately preceding the year in which the gratuity is paid or 20 months' salary as calculated. Thus, the least of these items is exempt from income tax under Section 10(10).

6. Commutation of pension

The entire amount of any payment in commutation of pension by a government servant or any payment in commutation of pension from LIC [Get Quote] pension fund is exempt from income tax under Section 10(10A) of IT Act.

However, in respect of private sector employees, only the following amount of commuted pension is exempt, namely: (a) Where the employee received any gratuity, the commuted value of one-third of the pension which he is normally entitled to receive; and (b) In any other case, the commuted value of half of such pension.

It may be noted here that the monthly pension receivable by a pensioner is liable to full income tax like any other item of salary or income and no standard deduction is now available in respect of pension received by a tax payer.

7. Leave salary of central government employees

Under Section 10(10AA) the maximum amount receivable by the employees of central government as cash equivalent to the leave salary in respect of earned leave at their credit upto 10 months' leave at the time of their retirement, whether on superannuation or otherwise, would be Rs. 3,00,000.

8. Voluntary retirement or separation payment

Under the provisions of Section 10(10C), any amount received by an employee of a public sector company or of any other company or of a local authority or a statutory authority or a cooperative society or university or IIT or IIM at the time of his voluntary retirement (VR) or voluntary separation in accordance with any scheme or schemes of VR as per Rule 2BA, is completely exempt from tax. The maximum amount of money received at such VR which is so exempt is Rs. 500,000.

9. Life insurance receipts

Under Section 10(10D), any sum received under a Life Insurance Policy (LIP), including the sum allocated by way of bonus on such policy, other than u/s 80DDA or under a Keyman Insurance Policy, or under an insurance policy issued on or after 1.4.2003 in respect of which the premium payable for any of the years during the term of the policy exceeds 20 per cent of the actual capital sum assured, is fully exempt from tax.

However, all moneys received on death of the insured are fully exempt from tax Thus, generally moneys received from life insurance policies whether from the Life Insurance Corporation or any other private insurance company would be exempt from income tax.

10. Payment received from provident funds

Under the provisions of Sections 10(11), (12) and (13) any payment from a government or recognised provident fund (PF) or approved superannuation fund, or PPF is exempt from income tax.

11. Certain types of interest payment

There are certain types of interest payments which are fully exempt from income tax u/s 10 (15). These are described below:

(i) Income by way of interest, premium on redemption or other payment on such securities, bonds, annuity certificates, savings certificates, other certificates issued by the Central Government and deposits as the Central Government may, by notification in the Official Gazette, specify in this behalf.
(iia) In the case of an individual or a Hindu Undivided Family, interest on such capital investment bonds as the Central Government may, by notification in the Official Gazette, specify in this behalf (i.e. 7 Capital Investment Bonds);
(iib) In the case of an individual or a Hindu Undivided Family, interest on such Relief Bonds as the Central Government may, by notification in the Official Gazette, specify in this behalf (i.e., 9 per cent or 8.5 per cent or 8 per cent or 7 per cent Relief Bonds); (iid) Interest on NRI bonds;
(iiia) Interest on securities held by the issue department of the Central Bank of Ceylon constituted under the Ceylon Monetary Law Act, 1949;
(iiib) Interest payable to any bank incorporated in a country outside India and authorised to perform central banking functions in that country on any deposits made by it, with the approval of the Reserve Bank of India [Get Quote] or with any scheduled bank;
(iv) Certain interest payable by Government or a local authority on moneys borrowed by it, including hedging charges on currency fluctuation (from the AY 2000-2001), etc.;
(v) Interest on Gold Deposit Bonds;
(vi) Interest on certain deposits are: Bhopal Gas victims;
(vii) Interest on bonds of local authorities as notified,
(viii) Interest on 6.5 per cent Savings Bonds [Exempt] issued by the RBI, and
(ix) Stipulated new tax free bonds to be notified from time to time.

12. Scholarship and awards, etc

Any kind of scholarship granted to meet the cost of education is exempt from tax under Section 10(16). Similarly, certain awards and rewards, etc. are completely exempt from tax under Section 10(17A), for example, Lakhotia Puraskar of Rs 100,000 awarded to the best Rajasthani author, every year under Notification No. 199/28/95-IT (A-I) dated 22-4-1996.

Any daily allowance received by a Member of Parliament or by an MLA or any member of any Committee of Parliament or State legislature is also exempt from tax under Section 10(17).

13. Gallantry awards, etc. -- Section 10(18)

The Finance Act, 1999 has, with effect from AY 2000-2001, provided for complete exemption for the pension and family pension of Gallantry Award Winners like Paramvir Chakra, Mahavir Chakra, and Vir Chakra and also other Gallantry Award winners notified by the Central Government.

14. Dividends on shares and units -- Section 10(34) & (35)

With effect from the Assessment Year 2004-05, the dividend income and income of units of mutual funds received by the assessee completely exempt from income tax.

15. Long-term capital gains of transfer of securities -- Section 10(38)

With effect from FY 2004-05, any income arising to a taxpayer on account of sale of long-term capital asset being securities is completely outside the purview of tax liability especially when the transaction has been subjected to Securities Transaction Tax (STT).

Thus, if the shares of any company listed in the stock exchange are sold after holding it for a minimum period of one year then there will be no liability to payment of capital gains. This provision would even apply for the old shares which are held by an assessee and are sold after the Finance (No.2) Act, 2004 came into force.

16. Amount received by way of gift, etc -- Section 10(39)

As per the Finance (No. 2) Act, 2004, gift, etc. received after 1-9-2004 by an individual or an HUF whether in cash or by way of credit, etc. is being subjected to tax if the same is not received from a stipulated relative. Section 10(39) provides that the amount received to the extent of Rs 50,000 will, however, be exempt from the purview of tax payment.

Similarly, amount received on the occasion of marriage from non-relatives, etc. would also be exempted. It may be noted that the gift from relatives, as specified in the section can be received without any upper limit.

17. Tax exemption regarding reverse mortgage scheme -- sections 2(47) and 47(x)

Any transfer of a capital asset in a transaction of reverse mortgage for senior citizens under a scheme made and notified by the Central Government would not be regarded as a transfer and therefore would not attract capital gains tax. The loan amount would also be exempt from tax. These amendments by the Finance Bill, 2008 apply from FY 2007-08 onwards.

17 tax-free incomes for you

2008-04-02T18:22:00.001-07:00

The following are 17 important items of income, which are fully exempt
from income tax and which a resident individual Indian assessee can use
with profit for the purpose of tax planning.

1. Agricultural income

Under the provisions of Section 10(1) of the Income Tax Act,
agricultural income is fully exempt from income tax.

However, for individuals or HUFs when agricultural income is in excess
of Rs 5,000, it is aggregated with the total income for the purposes of
computing tax on the total income in a manner which results into "no"
tax on agricultural income but an increased income tax on the other income.

Agricultural income which fulfils the above conditions is completely
exempt from tax. The manner of calculating tax on total income and
agricultural income, is explained in the following illustration:

Illustration

For FY 2008-09 (assessment year 2009-10), a male individual has a total
income from trading in textiles amounting to Rs 1,52,000; besides, he
has earned Rs 40,000 as income from agriculture.

The income tax payable by him will be computed as under:

* On the first Rs 150,000 of the taxable non-agricultural income: Nil
* On the next Rs 40,000 of agricultural income (falling under 10%
slab): Nil
* On the next Rs 2,000 of taxable non-agricultural income @ 10 per
cent: Rs 200
* Income tax on aggregated income of Rs 152,000 + Rs 40,000 = Rs
192,000: Rs 200

2. Receipts from Hindu Undivided Family (HUF)

Any sum received by an individual as a member of a Hindu Undivided
Family, where the said sum has been paid out of the income of the
family, or, in the case of an impartible estate, where such sum has been
paid out of the income of the estate belonging to the family, is
completely exempt from income tax in the hands of an individual member
of the family under Section 10(2).

3. Share from a partnership firm

Under the provisions of Section 10(2A), in the case of a person being a
partner of a firm which is separately assessed as such, his share in the
total income of the firm is completely exempt from income tax since AY
1993-94.

For this purpose, the share of a partner in the total income of a firm
separately assessed as such would be an amount which bears to the total
income of the firm the same share as the amount of the share in the
profits of the firm in accordance with the partnership deed bears to
such profits.

4. Allowance for foreign service

Any allowances or perquisites paid or allowed as such outside India by
the Government to a citizen of India, rendering service outside India,
are completely exempt from tax under Section 10(7). This provision can
be taken advantage of by the citizens of India who are in government
service so that they can accumulate tax-free perquisites and allowances
received outside India.

5. Gratuities

Under the provisions of Section 10(10) of the IT Act, any
death-cum-retirement gratuity of a government servant is completely
exempt from income tax. However, in respect of private sector employees
gratuity received on retirement or on becoming incapacitated or on
termination or any gratuity received by his widow, children or
dependants on his death is exempt subject to certain conditions.

The maximum amount of exemption is Rs. 3,50,000;. Of course, this is
further subject to certain other limits like the one half-month's salary
for each year of completed service, calculated on the basis of average
salary for the 10 months immediately preceding the year in which the
gratuity is paid or 20 months' salary as calculated. Thus, the least of
these items is exempt from income tax under Section 10(10).

6. Commutation of pension

The entire amount of any payment in commutation of pension by a
government servant or any payment in commutation of pension from LIC
[Get Quote] pension fund is exempt from income tax under Section 10(10A)
of IT Act.

However, in respect of private sector employees, only the following
amount of commuted pension is exempt, namely: (a) Where the employee
received any gratuity, the commuted value of one-third of the pension
which he is normally entitled to receive; and (b) In any other case, the
commuted value of half of such pension.

It may be noted here that the monthly pension receivable by a pensioner
is liable to full income tax like any other item of salary or income and
no standard deduction is now available in respect of pension received by
a tax payer.

7. Leave salary of central government employees

Under Section 10(10AA) the maximum amount receivable by the employees of
central government as cash equivalent to the leave salary in respect of
earned leave at their credit upto 10 months' leave at the time of their
retirement, whether on superannuation or otherwise, would be Rs. 3,00,000.

8. Voluntary retirement or separation payment

Under the provisions of Section 10(10C), any amount received by an
employee of a public sector company or of any other company or of a
local authority or a statutory authority or a cooperative society or
university or IIT or IIM at the time of his voluntary retirement (VR) or
voluntary separation in accordance with any scheme or schemes of VR as
per Rule 2BA, is completely exempt from tax. The maximum amount of money
received at such VR which is so exempt is Rs. 500,000.

9. Life insurance receipts

Under Section 10(10D), any sum received under a Life Insurance Policy
(LIP), including the sum allocated by way of bonus on such policy, other
than u/s 80DDA or under a Keyman Insurance Policy, or under an insurance
policy issued on or after 1.4.2003 in respect of which the premium
payable for any of the years during the term of the policy exceeds 20
per cent of the actual capital sum assured, is fully exempt from tax.

However, all moneys received on death of the insured are fully exempt
from tax Thus, generally moneys received from life insurance policies
whether from the Life Insurance Corporation or any other private
insurance company would be exempt from income tax.

10. Payment received from provident funds

Under the provisions of Sections 10(11), (12) and (13) any payment from
a government or recognised provident fund (PF) or approved
superannuation fund, or PPF is exempt from income tax.

11. Certain types of interest payment

There are certain types of interest payments which are fully exempt from
income tax u/s 10 (15). These are described below:

(i) Income by way of interest, premium on redemption or other payment
on such securities, bonds, annuity certificates, savings certificates,
other certificates issued by the Central Government and deposits as the
Central Government may, by notification in the Official Gazette, specify
in this behalf.
(iia) In the case of an individual or a Hindu Undivided Family, interest
on such capital investment bonds as the Central Government may, by
notification in the Official Gazette, specify in this behalf (i.e. 7
Capital Investment Bonds);
(iib) In the case of an individual or a Hindu Undivided Family, interest
on such Relief Bonds as the Central Government may, by notification in
the Official Gazette, specify in this behalf (i.e., 9 per cent or 8.5
per cent or 8 per cent or 7 per cent Relief Bonds); (iid) Interest on
NRI bonds;
(iiia) Interest on securities held by the issue department of the
Central Bank of Ceylon constituted under the Ceylon Monetary Law Act, 1949;
(iiib) Interest payable to any bank incorporated in a country outside
India and authorised to perform central banking functions in that
country on any deposits made by it, with the approval of the Reserve
Bank of India [Get Quote] or with any scheduled bank;
(iv) Certain interest payable by Government or a local authority on
moneys borrowed by it, including hedging charges on currency fluctuation
(from the AY 2000-2001), etc.;
(v) Interest on Gold Deposit Bonds;
(vi) Interest on certain deposits are: Bhopal Gas victims;
(vii) Interest on bonds of local authorities as notified,
(viii) Interest on 6.5 per cent Savings Bonds [Exempt] issued by the
RBI, and
(ix) Stipulated new tax free bonds to be notified from time to time.

12. Scholarship and awards, etc

Any daily allowance received by a Member of Parliament or by an MLA or
any member of any Committee of Parliament or State legislature is also
exempt from tax under Section 10(17).

13. Gallantry awards, etc. -- Section 10(18)

The Finance Act, 1999 has, with effect from AY 2000-2001, provided for
complete exemption for the pension and family pension of Gallantry Award
Winners like Paramvir Chakra, Mahavir Chakra, and Vir Chakra and also
other Gallantry Award winners notified by the Central Government.

14. Dividends on shares and units -- Section 10(34) & (35)

With effect from the Assessment Year 2004-05, the dividend income and
income of units of mutual funds received by the assessee completely
exempt from income tax.

15. Long-term capital gains of transfer of securities -- Section 10(38)

With effect from FY 2004-05, any income arising to a taxpayer on account
of sale of long-term capital asset being securities is completely
outside the purview of tax liability especially when the transaction has
been subjected to Securities Transaction Tax (STT).

Thus, if the shares of any company listed in the stock exchange are sold
after holding it for a minimum period of one year then there will be no
liability to payment of capital gains. This provision would even apply
for the old shares which are held by an assessee and are sold after the
Finance (No.2) Act, 2004 came into force.

16. Amount received by way of gift, etc -- Section 10(39)

As per the Finance (No. 2) Act, 2004, gift, etc. received after 1-9-2004
by an individual or an HUF whether in cash or by way of credit, etc. is
being subjected to tax if the same is not received from a stipulated
relative. Section 10(39) provides that the amount received to the extent
of Rs 50,000 will, however, be exempt from the purview of tax payment.

Similarly, amount received on the occasion of marriage from
non-relatives, etc. would also be exempted. It may be noted that the
gift from relatives, as specified in the section can be received without
any upper limit.

17. Tax exemption regarding reverse mortgage scheme -- sections 2(47)
and 47(x)

Any transfer of a capital asset in a transaction of reverse mortgage for
senior citizens under a scheme made and notified by the Central
Government would not be regarded as a transfer and therefore would not
attract capital gains tax. The loan amount would also be exempt from
tax. These amendments by the Finance Bill, 2008 apply from FY 2007-08
onwards.

Expert speak: 'ELSS funds can reduce your tax burden'

2008-03-13T09:44:00.001-07:00

Come the last quarter (January-March) of each financial year, it is not uncommon to find the salaried class scouring the horizon for making investments in tax savings instruments in a bid to bring down their tax liability.

Normally, the tax-savings schemes or instruments that come first to taxpayers' mind are the public provident fund, pension plans, national savings certificate and national savings scheme. These instruments, no doubt, are gilt-edged when it comes to protection of investors' capital (they offer assured returns, so no loss of capital) but their returns leave much to be desired.

However, if you desire superior returns as compared to the plain vanilla traditional savings schemes /instruments, then you could consider investing a portion of the Rs 1,00,000 tax savings limit under Section 80C of the Income Tax Act in equity linked savings schemes (ELSS) floated by various mutual funds.

Why ELSS?

Among all the instruments that are eligible for tax benefit, ELSS has the lowest lock-in period of three years. ELSS mainly invests in Indian equities with an objective to generate capital appreciation over a period of time.

The lock-in period of three-years for investments helps the ELSS fund manager to season and mature investments in companies which have hidden growth potential.

The India growth story continues to be strong and makes it compelling for any investor with a three year horizon to participate and generate capital appreciation.

Time and again it has been proved that equities have outperformed all other asset classes over a long period of time. A study of the top performing schemes shows that on an average they gave 30 per cent plus returns in the last one year and 40 per cent plus in the last three years as compared to eight per cent returns given by the administered savings schemes.

The real returns post inflation and taxes are significantly higher as compared to any other traditional form of tax savings instrument.

By investing in ELSS, taxpayers not only reduce their immediate tax liability u/s 80C but the gains earned out of the investments also qualify for long-term gains resulting in zero tax as per the current tax laws.

It's simple�

If you are thinking how to go about investing is ELSS then it is very simple and easy to invest in the ELSS of mutual funds (MFs).

~ All one needs to do is fill up an application form, attach KYC (know your customer) documents and a cheque for the amount you would like to invest.

~ The forms are available with the retail outlets of MFs, banks, broking firms, and financial advisors spread across the country.

~ Unlike investment in stocks, a mutual fund investor is not required to open or maintain a demat account.

Out of all the schemes -- growth, income, balanced, money market, tax-saving and special (index and sector-specific) -- being offered by MFs, only ELSS has a compulsory lock-in period of three years from the date of investment.

What this means is that in case you have invested through the systematic investment plan (SIP) route ie a fixed amount of investment every month, the lock in for the last SIP will be three years from the date of the last installment. You can remain invested even after the lock in period is over in case you do not need funds at that point of time as equities generate higher growth over longer period of time.

What's in an NAV?

While choosing an ELSS, do not be misguided if somebody advises you to invest in a scheme which has a lower net asset value (NAV) as against the one which has a higher NAV. There is a myth that lower NAV is cheap and higher NAV is expensive.

Let me illustrate with an example.

Let us assume that you invest Rs 10,000 in scheme A with NAV of Rs 10 and also in scheme B with NAV of Rs 100. You get 1,000 units in scheme A and 100 units in scheme B. The markets are expected to deliver, say, 20 per cent return. One year later the NAV of scheme A will be Rs 12 and of scheme B Rs 120.

If you redeem both the schemes, you will get Rs 12,000 from scheme A (1,000 units* Rs 12) and Rs 12,000 from scheme B as well (100 units*Rs.120).

Think of your financial goals

If you have to choose between ELSS and the administered (fixed) interest rate schemes, your decision should be based on your need (financial goals) rather then any other reasons.

While making a decision to buy ELSS or other MF schemes, do not get carried away by the last few years' returns as past performance is no guarantee of future performance. What you should look at is the track record of the fund house, the investment team, consistency in terms of performance and the kind of processes and experience the investment house offers.

Among others, MFs like Kotak, Fidelity, Reliance [Get Quote], HDFC [Get Quote] and DSP have been giving decent returns to investors. So, if you are considering making investments for lightening your tax burden this financial year, then ELSS should also be a part of your tax-saving portfolio. It not only gives you the opportunity to participate in the India growth story but also saves taxes, thereby making it a great investment tool.

Expert speak: 'ELSS funds can reduce your tax burden'

2008-03-08T04:22:00.000-08:00

Why ELSS?

The lock-in period of three-years for investments helps the ELSS fund manager to season and mature investments in companies which have hidden growth potential.

The India growth story continues to be strong and makes it compelling for any investor with a three year horizon to participate and generate capital appreciation.

The real returns post inflation and taxes are significantly higher as compared to any other traditional form of tax savings instrument.

It's simple�

If you are thinking how to go about investing is ELSS then it is very simple and easy to invest in the ELSS of mutual funds (MFs).

~ All one needs to do is fill up an application form, attach KYC (know your customer) documents and a cheque for the amount you would like to invest.

~ The forms are available with the retail outlets of MFs, banks, broking firms, and financial advisors spread across the country.

~ Unlike investment in stocks, a mutual fund investor is not required to open or maintain a demat account.

What's in an NAV?

Let me illustrate with an example.

If you redeem both the schemes, you will get Rs 12,000 from scheme A (1,000 units* Rs 12) and Rs 12,000 from scheme B as well (100 units*Rs.120).

Think of your financial goals

If you have to choose between ELSS and the administered (fixed) interest rate schemes, your decision should be based on your need (financial goals) rather then any other reasons.

When agents mis-sell tax plans

2008-03-03T09:22:00.001-08:00

To begin with, as financial planners, we meet thousands of clients across several cities to help them realise their investment objectives. So being in the industry, we know first hand about the mis-selling that happens - how it is done, how facts are mis-represented and very basic information that is either not provided at all or provided grudgingly only on being asked.

From the feedback we have received, some agents/distributors have taken exception to the previous article. They maintain that there is no mis-selling in the industry and it's only become fashionable to talk about it.

Actually, mis-selling is so rampant that not just investors, even regulators have noticed it and have taken a series of steps to address it. That is why both Insurance Regulatory and Development Authority and Securities and Exchange Board of India have actively taken measures to avert mis-selling in unit linked insurance plans and mutual funds respectively.

To us, it appears that agents/distributors are upset with articles on mis-selling because it instinctively implies that they are the ones who are doing it. We would like to clear the air over here. Since Personalfn is also in the mutual fund distribution business, complaints of mis-selling also implicate us.

We don't think that agents/distributors who are not mis-selling have any reason to feel offended. Investors are upset only with the agents/distributors who mis-sell, not with those who conduct their business in an ethical and transparent manner. Agents/distributors who are ethical and transparent in their dealings have nothing to be upset about; rather we request them to join hands with Personalfn in making the industry ethical and transparent.

In the previous article, there were instances of mis-selling that were witnessed first hand by the author. From the feedback we received from investors (reporting even more instances of mis-selling) we have culled out some more cases.

Tax-planning season is at the fag end and expectedly, agents are going all out to sell tax-saving investments. Both the cases that we have reported in this note involve tax-saving investments.

The first instance is about a relatively aged investor with a low risk appetite. He reported that his NSC/PPF agent who had traditionally sold him only PPF and NSC, this year pitched for a tax-saving NFO (new fund offer). The agent's rationale was - why be satisfied with an 8% return from PPF when you can make at least double that amount and even get a tax benefit? Of course, the agent only emphasised on the higher returns and never even mentioned the higher risk involved in a tax-saving fund (when compared to a PPF/NSC).

We are not sure about that agent, but as mutual fund distributors, we found the idea of an aged, risk-averse investor being sold a tax-saving fund, that too an NFO (read no track record) without even making the investor aware of the higher risk involved, extremely unethical.

In another instance, an investor reported a common grievance. We have reported such cases in the past on the website; the only reason we are repeating it over here is because given the pressure applied on agents to meet sales targets, we expect even more cases and wish to alert our readers before it happens to them.

This visitor reported that he approached his insurance agent for a life insurance policy. He wished to opt for a life cover through an endowment plan. His agent however had other plans. The agent recommended that he invest in a ULIP instead. When the visitor asked the agent why a ULIP was the more preferable option, his agent's rationale was that unlike an endowment plan, which involved a longer premium commitment, the ULIP would entail paying premiums only for 3 years, after which the visitor could discontinue paying the premiums.

In other words, the policy will be in force even if premium payments are discontinued thereafter. But that's only part of the picture. The other relevant bit (that the agent conveniently chose not to inform the visitor) is that, though the policy will continue to be in force, mortality charges will be deducted from the ULIP's corpus in the future as well.

Put simply, the insurance company will continue to make necessary deductions from the policy's total accumulated corpus. Hence, the accumulated amount will continue to erode with each unpaid premium. Only the balance amount (net of mortality charges) will continue to be invested in the markets. Furthermore, when the ULIP's corpus is insufficient to service the mortality charges, the policy will cease, thereby depriving the investor of an insurance cover.

Like we mentioned, there were a lot more instances of mis-selling reported by visitors. We have short-listed the two instances that were most relevant from a tax-planning perspective. We urge investors to be even more diligent since the reported cases of mis-selling have increased manifold (the unreported cases are a multiple of the reported ones). To agents/distributors who are not mis-selling, we can only admire them for their resolve in the face of intense competition and tempting commissions.

Top 10 ELSS funds: Save tax, make money

2008-03-02T09:06:00.001-08:00

March 31 is round the corner. You must be scrambling to invest your money to save tax. And what else can be a better opportunity than putting your money in equity linked saving schemes or ELSS as they are popularly known.

They have attracted the attention of investors and tax-savers not only because they help us save tax but they also perform well to give decent returns in the long-term.

The markets may have been volatile in the last one month but ELSS schemes seem to have bettered the markets in terms of returns delivered to investors.

For while the 30-stock benchmark, the Sensex, has delivered a return of 28 per cent, the top 10 ELSS mutual funds have delivered a return of more than 26 per for the period between January 9, 2007 and February 8, 2008.

Taurus Libra Taxshield leads the pack for the period under consideration with a hefty return of 59.33 per cent.

Simply put if you had invested Rs 10,000 on January 9, 2007 this amount would have increased to Rs 159.33 as on February 8, 2008. What's more your investment of Rs 10,000 (or as much as you had invested) would have been tax-exempt as well.

Going further down this list DSP ML Tax Saver Fund is the first runner-up notching a gain of 43.6 per cent and Lotus India Tax Plan follows with a gain of 38.1 per cent for the given period.

While seven funds in this list have outperformed the Sensex, three funds in this list, could not outperform the Sensex returns during the period under consideration.

These are Kotak Taxsaver (27.45 per cent), Sundaram BNP Paribas Tax Saver 98 (26.58 per cent) and Principal Personal Taxsaver (26.06 per cent).

The table below shows the top 10 ELSS funds:

Open ended - Equity: Tax planning (one year returns as on February 8, 2008

Fund	Returns (%)
Taurus Libra Taxshield	59.33
DSP ML Tax Saver Fund	43.6
Lotus India Tax Plan	38.1
DWS Tax Saving Fund	36.07
Sundaram BNP Paribas Tax Saver	33.46
Escorts Tax Plan	32.24
Sahara Tax Gain	31.41
Kotak Taxsaver	27.45
Sundaram BNP Paribas Tax Saver 98	26.58
Principal Personal Taxsaver	26.06

IT exemption: FM wins the heart of young professionals

2008-03-02T08:57:00.000-08:00

Finance Minister P Chidambaram has done it -- won the hearts of young salaried individuals, that is!

In the Union Budget 2008-09, the Finance Minister has raised the income tax exemption limit for women from 1.45 lakh to Rs 1.80 lakh and for men from Rs 1.10 lakh to Rs 1.50 lakh.

"The Finance Minister seems to have brought smiles to everybody's faces, not just salaried individuals," says Gautam Sheth, 24, a correspondent/ copy editor with DNA and an individual who falls within the 30 percent tax bracket. "Mr Chidambaram has definitely created a buzz with his budget proposal of raising the IT exemption limit. Of course, there will always be critics who will try to find fault with this year's budget," he adds.

"It's an excellent step," quips 24-year-old Sumit Kar, himself a salaried individual and a section officer at the Principal Accountant General's office in Kolkata. In fact, he was surprised with the Rs 40,000 increase in the exemption limit. "I was not really expecting the hike to 1.5 lakhs. I thought the Finance Minister might increase the exemption limit to somewhere within the 1.25-1.3 lakh range. Everyone is happy."

Sonali Talwalkar, 33, who works in the HR department of Talwalkar's Gymnasiums and falls under the 30 percent tax bracket, agrees. Although she was expecting a raise in the exemption limit for women upto Rs 2 lakh, she believes that "something is better than nothing".

So what will she do with the extra money she has now? "Being a mother of two, I will save the extra amount for my children," she says gratefully.

But how much will the proposed raise in exemption limit help salaried individuals, both men and women? Here's a brief illustration created by expert Mahesh Padmanabhan of RelaxWithTax:

Depending on the tax brackets, Mr Chidambaram's bonanza will help save anywhere between Rs 4,000 to Rs 44,000 for men and Rs 6,500 to Rs 43,500 for women.

But the young at heart are also aware that the Finance Minister has doled out the goodies with one eye on the general elections due in early 2009. Says Nityashjit Kaur, 24, a law associate at Dua associates in New Delhi: "Though the increase in exemption limit is a help to some extent, I think it has been introduced with an eye on the general elections due sometime next year."

She says if Mr Chidambaram really has to improve the lot of salaried people in India, then he needs to think long term. Nityashjit's friend Ruchi Malhotra, 25, working in the same law firm, concurs. "But of course, the move will put more money into the hands of salaried professionals and people like us will have higher purchasing power. This will also help boost consumption, which is like killing two birds using one stone," she remarks pointedly.

Both of them, however, are happy that they will now have more money to spend and save.

Gautam feels that it does not matter whether the Finance Minister's intention is political or not. "How does it really matter?" he asks. "So long as we get more money in our hands!"

Like everyone who spoke to Rediff.com, Gautam too, will splurge a little cash. "I am going to spend a good amount of the money I save on luxury items!" he declares.

Raghu Iyengar, 31, a call centre employee working with Wipro Limited, has the last word and puts the matter in proper perspective.

"I will be able to save a lot of money now as I fall within the 30 percent tax bracket. The Rs 10,000 increase in IT exemption in last year's budget was marginal if one compares what the finance minister has done today. I am going to spend the extra money that I will get!"

Income Tax benefit from this Year

2008-03-02T00:10:00.001-08:00

For 2007-2008 Let us take a case where the assessee's income is Rs. 6,00,000.

According to the Income Tax Slab, the first 1,10,000 is not taxable.
The next Rs. 40,000 (1,50,000-1,00,000) is taxable @10%. So 10% of Rs. 40,000 is Rs. 4,000/-
The next 1,00,000 (2,50,000-1,50,000) is taxable @20% .So for 1,00,000 it is Rs 20,000/-
The remaining Rs.3,50,000 (6,00,000-2,50,000) @ 30%.So it will be Rs 1,05,000/-
Therefore, the net Income Tax Payable is Rs. 4,000 + Rs. 20,000 + Rs. 1,05,000 i.e Rs 1,29,000/-+Education Cess Extra

For 2008-2009 Let us take a case where the assessee's income is Rs. 6,00,000.

According to the Income Tax Slab, the first 1,50,000 is not taxable.
The next 1,50,000 (1,50,000-3,00,000) is taxable @10%.So 10% of 1,50,000 is Rs 15,000/-
The next 2,00,000 (5,00,000-3,00,000) is taxable @20%.So 20% of 2,00,000 is Rs 40,000/-
The remaining 1,00,000 (6,00,000-5,00,000) is taxable @30%.So 30% of 1,00,000 is Rs 30,000/-
Therefore, the net Income Tax Payable is Rs. 15,000 + Rs. 40,000 + Rs. 30,000 i.e Rs85,000/-+Education Cess Extra

So the benefit from this Budget for 6 lakhs salary individual is Rs 1,29,000- Rs85,000 i.e Rs 44,000/-

Is your provident fund withdrawal taxable?

2008-02-29T09:10:00.000-08:00

Are you planning to withdraw from from your provident fund account? Is such withdrawal exempt from tax? Is employer's contribution to provident fund taxable?

Is gratuity amount that you receive exempt from tax? Can you claim tax exemption on the money spent on your blind parents?

In a chat with readers on February 27, tax expert Mahesh Padmanabhan answered these and many more queries related to tax treatment of capital gains tax and EMIs paid for home loans?

For those of you who missed the chat, here is the transcript.

ankita asked, If i'm not liable to pay tax this financial year, can i show the investments done till now in next financial year?

Mahesh Padmanabhan answers, No you can claim deduction for eligible investments only in the year such investment is made.

iicci asked, if the apartment is bought in the joint name of husband and wife, can the wife give rent to the husband for his share of the property?

Mahesh Padmanabhan answers, There cannot be a commercial consideration between a husband and wife and hence it is not advisable for someone to use this route of tax planning.

sd asked, Hi Sir , I have one child 6 yrs old, what is best for his future either a MF(sip) or a ELSS for 12-15 yrs duration. I want to invest 35 k per year. can i invest in one plan?

Mahesh Padmanabhan answers, Financial planning per se is done keeping in mind various milestones or goals that an individual is interested in providing for. Hence in your case theoretically you could look at financial planning for your retirement, your child's education / marriage, health expenditures, holiday plans, asset purchase etc. Each of these goals would have certain time horizon / range for which the planning is to be done.

Generally, equities perform well in the long run and yields good returns in the long term horizon and the same applies to equity oriented Mutual Funds. In your case as the investment is with a long term perspective, you could definitely look at diversified equity oriented mutual funds (including ELSS from the perspective of tax saving). You could invest in multiple funds instead of putting your entire fund into one MF.

qwet asked, Mahesh, my father had lost his left eye long back, and now since my parents are old, my parents are dependent on me, i spend lots of money on their health (and i feel it as my responsibility), can i claim any tax rebate apart from that 1 lakh limit for the expenses incurred on him? if so what is the procedure?

Mahesh Padmanabhan answers, Section 80DD allows deduction in respect of maintenance including medical treatment of a dependant being a person with disability. Blindness is one of the listed disability and in case you incur even a rupee of expenditure, if you satisfy the other conditions, you could be eligible for a further deduction of Rs. 50000. Higher deduction of Rs. 75000 would be available if the disability is severe (i.e. over 80%).

archana asked, HELLO MAHESH FOR LAST FINACIAL YRS I HAVE NOT INVESTED IN ANY INSURANCE OR MUTUAL FUND AND THAT YRS I HAVE VERY LARGE AMT OF TAX AT THIS TIME I HAVE INVESTED IN BAJAJ ALLIANCE MUTUL FUND UP TO RS 50000 AND IN POST UPTO RS RS 75000 IS THIS FUNDS IS GOOD TO SAVE THE TAX IF NOT WHICH WILL BE THE BEST SCHEMES TO SAVE UPTO CERTAIN PERCENT OF TAX?

Mahesh Padmanabhan answers, Section 80C offers deduction of upto Rs 100000 from the taxable income and defines the investment options available. If you have invested in the ULIP scheme of Bajaj and have invested in NSC of post office, then you have exhausted your eligible limit of deduction under section 80C. Other options are PPF, 5 year term deposits with scheduled banks, ELSS, MFs etc.

vsnurdy asked, hi mahesh good afternoon i'm going to start my career in july of this year.my monthly salary is around 33k. as a young investor where do you suggest me to invest money and what is good part of my money i have to put in saving every month for comfortable future as i'm planning to get married after 2 years?

Mahesh Padmanabhan answers, It is always wise to start off investing early on in your career. Here is a broad rule that you could follow in managing your finances:

1. Draw up a fund flow statement with all your monetary inflows and outflows. This would give you a reasonable hang on your financial position and the amount available for your investments.

2. Start investing regularly (preferably monthly basis) with the following priority sequence; life insurance coverage, health insurance coverage, mutual funds (including ELSS), debt instruments (such as PPF, NSC, term deposits etc), equities.

3. Keep track of your investments and be a long term player. For a short term requirement you could start a recurring deposit with any nationalised or private sector banks.

Mahesh asked, Even last time when you were on rediff I had asked this question. Please answer this. I am a salaried person. I also do trading in Futures on NSE. My turnover is more than Rs.2crore. The profit position is around Rs.5lakh. Do I need to get tax audit done in this case?

Mahesh Padmanabhan answers, Turnover for the purpose futures trading is not based on the gross trading but on the net figures. Hence only if the net figures are in excess of the stipulated limits, tax audit would be applicable else the same would be applicable.

skumar asked, Is the interest income from post office savings account taxable?

Mahesh Padmanabhan answers, Yes the interest from post office savings is taxable.

sanjib asked, SIR, GOOD AFTERNOON, ONE QUESTION THAT I HAV ONE LIFE POLICY THAT POLICY NOMINEE IS MY MOTHER. CAN MY FATHER GET INCOME TAX BENIFIT OF MY POLICY? PLEASE SUGGEST ME, I AM WAITING YOUR REPLY.

Mahesh Padmanabhan answers, In case your father is paying the premium on the policy taken on your life, then yes he can claim the deduction for the same.

vijay asked, hi mahesh, I WANT TO KNOW WHETHER UNIT LINKED POLICY IS BETTER THAN INVESTING IN TERM INSURANCE AND MUTUTAL FUND?

Mahesh Padmanabhan answers, Our advice to our viewers has always been to look at an investment class independantly and not to mix multiple needs from one investment. Look at securing your life risk cover with as much cheap insurance as possible (which is possible only with the likes of term insurance) and for the purpose of investment look at other options such as MFs, Equities, ULIP funds etc.

Logix asked, HELLO MAHESH, I AM PLANNING TO WITHDRAW MY PF ACCOUNT. SO FAR THE PF ACCOUNT WAS IN A DORMANT STATE AND NOW ITS MORE THAN 5 YEARS SINCE THE ACCOUNT WAS OPENED. IF I WITHDRAW NOW, WILL IT ATTRACT ANY TDS?

Mahesh Padmanabhan answers, PF withdrawal is not taxable only if a person has been in continuos service for 5 years. In your case if you have had PF balance from your previous employer then such balance should have been transferred from your previous employer to your current employer and the period of service of both employers would need to be aggregated to check if you have completed 5 years of continuous service.

virendra asked, Dear Mahesh Is retail investor in share market liable to pay tax on capital gain? if so please tell the limit of capital gain? virendra, delhi

Mahesh Padmanabhan answers, Capital gains tax is applicable on the gains from equity share sale. This is applicable to all investors and in case the transaction is done through any recognised stock exchange and STT is paid on the transaction then the gains is chargeable at a special rate. In case of short term capital gains (i.e. assets held for less than 12 months) the rate is 10% (base rate) and for long term capital gains, it is currently taxable at 0%.

J.C. Thukral asked, Whether deduction is admissible for repayment of housing loan, principal and interest, in respect of the second house purchased with the loan? First house was also purchased with loan and still repaying. What if the second house is let out and what if lying vacant?

Mahesh Padmanabhan answers, In case an individual has multiple house property then 1 house (at the option of the individual) could be treated as self occupied house property and the other house/s would be treated as deemed to be let out if it has not been actually let out. In case of deemed let out property, fair rent for such property would be taxable and you would be eligible for a standard deduction of 30% on the net value and the interest deduction. The deductions are also available to let out property. In case of self occupied property, you would be eligible to a deduction of the loan interest only upto a limit of Rs. 1.5 lakhs.

vaddanam asked, HI Mahesh I have a loan from a bank nearly two lakhs. This is personal loan and I am paying in emi. Can this be shown in it returns? IS there a chance of tax exemption for this?

Mahesh Padmanabhan answers, In case such personal loan has been used for the purpose of your business or profession, then the interest on such loans can be used as deduction from your income, else the same would have no bearing on your tax calculation.

rameshr asked, hi mahesh, is gratuity exempt from tax?

Mahesh Padmanabhan answers, Section 10(10) of the income tax act defines the exemption from tax of gratuity receipt. Subject to the conditions being met, the max amount that you could claim is upto Rs. 3.5 Lakhs. However, please note that such limit is for the lifetime of an individual i.e if you have already claimed Rs. 1.5 lakhs of gratuity exemption earlier, the balance i.e. Rs. 2 Lakhs is the max amount eligible.

Mahendra asked, Mahendra : My father-in-law is retired person, is it compulsory for him to file IT returns?

Mahesh Padmanabhan answers, An individual is supposed to file his/her IT returns if he/she has taxable income in excess of the threshold limits. In case your father in law is a senior citizen, then the current threshold limit is Rs. 1.95 lakhs.

rajakattur asked, Sir, Whether the PF deducted from the salary can be taken 100% for arriving taxable income?

Mahesh Padmanabhan answers, Employer's contribution to EPF is not considered as taxable salary subject to compliance of stipulated conditions. Employee contribution to EPF is considered as deduction under section 80C from the gross taxable income to determine the net taxable income.

nidhi asked, Are Mutual funds better options or IPOs?

Mahesh Padmanabhan answers, For a new entrant into the equities market, it is always advisable to invest through the MF route. Equity investments through IPO is good in case the company is good and you have a long term vision for the stock.

NarHS asked, Hi Mahesh, I am an NRI working in Kenya. For the past 11months iam working over here. 1. What documents I need to show in case if I want to file Tax returns? Thanks and regards, Naresh HS.

Mahesh Padmanabhan answers, Subject to the conditions being met, you would be currently slotted as Resident but not ordinarily resident (RNOR) in India. Accordingly all income generated in India is taxable here in India and such income generated outside India is not taxable in India. This is true till the currency of your status as RNOR. The documents that you would need is the PAN card copy & form 16 / form 16A ie. the certificate of tax deduction to file your returns.

Mahesh Padmanabhan says, Thank you friends for this interactive session, we would now be logging off and would return soon with insights on how the budget 2008 impacts you in the coming year. Thank you and have a good day. Mahesh

Mahesh Padmanabhan is principal advisor -- direct taxes group, RelaxWithTax Consultants Pvt Ltd, a Mumbai-based personal taxation and finance solutions provider.

How to take home a higher salary - Tax Planning

2008-02-24T07:42:00.000-08:00

How to take home a higher salary

Can two individuals having the same cost to company (CTC) package, earn different take home salaries?" a friend of mine enquired over the weekend. "Interesting question," I thought. A little bit of number crunching and I came up with the answer.

Yes, the salaries of two individuals having the same CTC, can vary. It all depends on the way the salaries are structured.

Let us take an example of two friends Ram and Shyam, who work for different companies but have the same CTC package of Rs 6 lakh (Rs 600,000) per annum.

As can be seen from the table given at the end, Shyam's takehome salary per month is Rs 45,937 whereas that of Ram is Rs 40,330. A clear difference of Rs 5,606 per month or around Rs 67,200 per annum, for the same CTC package!

Now how is that possible? Well, the answer to that question is very simple: Shyam's package -- as can be seen from the table below -- is heavy on reimbursements. The money Shyam gets as reimbursement is not taxable as long as he is able to provide bills for the same.

On the other hand, in Ram's case there are no reimbursements. Given this a major portion of his salary is taxable.

Both Ram and Shyam pay a rent of Rs 10,000 per month. The house rent allowance (HRA) in case of Ram is Rs 12,500 per month, whereas in case of Shyam it is Rs 6,250. As per the Income Tax Act, the entire HRA is not tax free. The tax deduction allowed is limited to the minimum of: a) The actual HRA an individual gets; b) The actual rent paid minus 10% of salary (which includes the basic salary plus the dearness allowance); c) 50% of salary if the individual happens to live in Mumbai, Chennai, Kolkata and Delhi and 40% of the salary in other cases.

If we follow the above rule the minimum in case of Ram works out to Rs 7,500. This figure comes from the second option. The actual rent paid is Rs 10,000. 10% of salary in case of Ram works out to Rs 2,500 (10% of basic salary of Rs 25,000). The difference between the two works out to Rs 7,500.

In case of Shyam the minimum works out to Rs 6,250, which is the actual HRA he receives. These are the amounts they are allowed as a tax deduction for their HRA.

As can be seen, Shyam gets his entire HRA as a tax deduction, whereas that is not the case with Ram. He only gets Rs 7,500 of his total HRA of Rs 12,500 as a tax deduction.

Other than this, companies these days have to pay a fringe benefit tax on the reimbursements it gives to its employees. This tax in most cases works out to 6.798% of the total reimbursements paid.

In Shyam's case the company does not want to bear this tax and passes it on to Shyam. The total for the year in case of Shyam works out to Rs 17,108 for the year. Shyam pays this up happily. His logic is that paying a tax of 6.798% is any day better than paying income tax which can be 10%, 20% or 30%, of the taxable income, depending on the tax bracket.

Both Ram and Shyam make their Section 80 C investments of up to Rs 1 lakh (Rs 100,000). Other than this they also have a medical insurance policy for which they pay a premium of Rs 10,000 per annum. For this a deduction is allowed under Section 80 D of the Income Tax Act.

Due to all these reasons the yearly tax outflow for Ram works out to Rs 80,031. The same in case of Shyam (including the FBT he pays back to the company) works out to Rs 30,755.

A clear difference of around Rs 50,000. And that is why Shyam earns more than Ram.

The moral of the story is, if you are in a position to negotiate your salary structure, go in for a structure that is heavy on reimbursements. That way the tax outflow will be lesser and, hence the take home pay much higher!

	Ram	Shyam
Salary
Basic Monthly Salary (taxable)	25000	12500
Employer's Contribution to PF	3000	1500
HRA	12500	6250
Medical (monthly)	1250	1250
Special Allowance	8250	7500
Total (A)	50000	29000
Reimbursements
Conveyance allowance	0	10000
Communication allowance (mobile, telephone, internet etc)	0	3000
Entertainment expenses	0	5000
Books and Periodicals	0	3000
Total(B)	0	21000
Fringe benefit tax per month( 6.789% of total monthly reimbursements)	0	1425.69
Fringe benefit tax per year( 6.789% of total yearly reimbursements)		17108.28
Total Monthly Salary (A+B)	50000	50000
Cost to company for the year (total monthly salary x 12)	600000	600000
Taxable Income (Basic+ HRA+Special Allowance) per month	45750	26250
Gross Yearly taxable Salary	549000	315000
Less: deduction for HRA	7500	6250
Less: Deduction u/s 80C, 80CCC & 80D	110000	110000
Less professional tax	2500	2500
Taxable Income	429000	196250
Tax	77700	13250
Add: Education Cess (3% of tax)	2331	397.5
Tax payable	80031	13647.5
Add: FBT Paid by company and recovered from the employee	0	17108.28
Total tax to be paid by the employee	80031	30755.78
Total monthly tax paid	6669.25	2562.9817
Employee's contribution to PF (12% of basic salary)	3000	1500
Monthly take home of employee (monthly salary ï¿½ tax paid ï¿½ PF contribution)	40330.75	45937.018

Tax planning does not mean evading tax

2008-02-23T23:38:00.001-08:00

Tax planning does not mean evading tax, but paying the right amount of tax to the government, said well-known chartered accountant B Chandrakanth Rao.

Speaking on the topic Personal Income Tax Planning,organized by Mangalore Productivity Council on Tuesday February 19, he said that tax planning was complex and time consuming in the past but the easy regime introduced by Prime Minister Dr Manmohan Singh during his tenure as finance minister has brought relief to the tax payers, he informed.

Most of the time we are busy in earning and spending, hence we do not take time to devise a right strategy to save tax which is an essential need. Moreover, one should understand the taxation laws to plan for the future,he advised.

Providing some tips to save income tax, he said that if any non-resident Indian is residing in India for less than 6 months in a year, the money earned by him abroad will not be accounted for taxation.

A salaried person should have provisions to receive his salary in various kinds of allowances other than receiving in a lump sum, he added.

When it comes to the matter of investment, there is no better option than owning a house. One should plan it as early as possible, he suggested.

Public Provident Fund (PPF), Unit Linked Insurance Plan, Equity Linked Savings Schemes are the other options to save the tax, he told.

IT Deductions

2008-02-23T19:55:00.001-08:00

1.80C

Qualifying products: NSC, notified bank deposits and post office time deposits, EPF and PPF, ELSS, life insurance plans, deferred pension plans

Mandatory requirements: Payment has to be made before 31 March 2008

Who can avail the deduction: Individuals and HUF (both resident and non-resident)

How much: Cannot exceed Rs 1 lakh.

2. 80CCC

Qualifying products: Pension plans of life insurers

Mandatory requirements: Payment has to be made before 31 March 2008

Who can avail the deduction: Individuals

How much: Within the overall limit of Section 80C (up to Rs 1 lakh)

3. 80D

Qualifying products: Medical insurance policies taken for self, spouse, dependant parents or children, or any member of HUF

Mandatory requirements: Premium should be paid through a cheque out of income chargeable to tax

Who can avail the deduction: Individuals, HUF

How much: Up to Rs 15,000; senior citizens can claim up to Rs 20,000

4. 80DD

Qualifying products: Expenses on the medical treatment of a dependent who is a person with a disability

Mandatory requirements: Certification by a medical authority

Who can avail the deduction: Resident individual or HUF

How much: Up to Rs 50,000, or up to Rs 75,000 if the dependant is a person with severe disability

5. 80DDB

Qualifying products: Expenses on the medical treatment of a specified disease (cancer, AIDS, neurological diseases, chronic renal failure and more)

Mandatory requirements: Certificate in Form No. 10-I to be submitted along with the income tax return form. Deduction is available if the amount is actually paid for treatment

Who can avail the deduction: Resident individuals or HUF

How much: Rs 40,000 (if the person treated upon is less than 65 years of age), or Rs 60,000

6. 80E

Qualifying products: Payment of interest on loan taken for higher studies

Mandatory requirements: Deduction is available in the year in which repayment starts and only for eight immediately succeeding assessment years

Who can avail the deduction: Individuals

How much: Deduction available on the total interest portion of education loan, the principal repayment gets no tax advantage

7. 80G

Qualifying products: Donations to certain funds and charitable institutions

Mandatory requirements: Not applicable

Who can avail the deduction: Resident individuals or HUF

How much: 50 or 100 per cent deduction on the entire donated amount, or 50 or 100 per cent deduction subject to 10 per cent of gross total income

8. 80GG

Qualifying products: Rent paid for residential purpose

Mandatory requirements: Should not be getting house rent allowance. Actual rent paid is in excess of 10% of the total income

Who can avail the deduction: Self-employed or salaried

How much: Excess of actual rent paid over 10 per cent of GTI, or 25 per cent of GTI, or Rs 2,000 per month, whichever is the lowest

9. 80U

Qualifying products: Expenses incurred on self, if disabled

Mandatory requirements: Certification by a medical authority to be furnished along with the income tax return form

Who can avail the deduction: Resident individuals

How much: Rs 50,000 for a person with disability, Rs 75,000 for a person with severe disability (disability of over 80 per cent

How to save INCOME TAX (Informative)

2008-02-20T09:48:00.000-08:00

1.80C

Qualifying products: NSC, notified bank deposits and post office time deposits, EPF and PPF, ELSS, life insurance plans, deferred pension plans

Mandatory requirements: Payment has to be made before 31 March 2008

Who can avail the deduction: Individuals and HUF (both resident and non-resident)

How much: Cannot exceed Rs 1 lakh.

2. 80CCC

Qualifying products: Pension plans of life insurers

Mandatory requirements: Payment has to be made before 31 March 2008

Who can avail the deduction: Individuals

How much: Within the overall limit of Section 80C (up to Rs 1 lakh)

3. 80D

Qualifying products: Medical insurance policies taken for self, spouse, dependant parents or children, or any member of HUF

Mandatory requirements: Premium should be paid through a cheque out of income chargeable to tax

Who can avail the deduction: Individuals, HUF

How much: Up to Rs 15,000; senior citizens can claim up to Rs 20,000

4. 80DD

Qualifying products: Expenses on the medical treatment of a dependent who is a person with a disability

Mandatory requirements: Certification by a medical authority

Who can avail the deduction: Resident individual or HUF

How much: Up to Rs 50,000, or up to Rs 75,000 if the dependant is a person with severe disability

5. 80DDB

Qualifying products: Expenses on the medical treatment of a specified disease (cancer, AIDS, neurological diseases, chronic renal failure and more)

Mandatory requirements: Certificate in Form No. 10-I to be submitted along with the income tax return form. Deduction is available if the amount is actually paid for treatment

Who can avail the deduction: Resident individuals or HUF

How much: Rs 40,000 (if the person treated upon is less than 65 years of age), or Rs 60,000

6. 80E

Qualifying products: Payment of interest on loan taken for higher studies

Mandatory requirements: Deduction is available in the year in which repayment starts and only for eight immediately succeeding assessment years

Who can avail the deduction: Individuals

How much: Deduction available on the total interest portion of education loan, the principal repayment gets no tax advantage

7. 80G

Qualifying products: Donations to certain funds and charitable institutions

Mandatory requirements: Not applicable

Who can avail the deduction: Resident individuals or HUF

How much: 50 or 100 per cent deduction on the entire donated amount, or 50 or 100 per cent deduction subject to 10 per cent of gross total income

8. 80GG

Qualifying products: Rent paid for residential purpose

Mandatory requirements: Should not be getting house rent allowance. Actual rent paid is in excess of 10% of the total income

Who can avail the deduction: Self-employed or salaried

How much: Excess of actual rent paid over 10 per cent of GTI, or 25 per cent of GTI, or Rs 2,000 per month, whichever is the lowest

9. 80U

Qualifying products: Expenses incurred on self, if disabled

Mandatory requirements: Certification by a medical authority to be furnished along with the income tax return form

Who can avail the deduction: Resident individuals

How much: Rs 50,000 for a person with disability, Rs 75,000 for a person with severe disability (disability of over 80 per cent)

HAPPY CHRISTMAS AND A VERY HAPPY AND PROSPEROUS NEW YEAR 2008 TO YOU

2007-12-30T22:00:00.000-08:00

HAPPY CHRISTMAS AND A VERY HAPPY AND PROSPEROUS NEW YEAR 2008 TO YOU .

LET YOUR CHERISHED DREAMS AND GOALS BE ACHIEVED IN THIS YEAR WITH GRACE OF ALMIGHTY AND YOUR INTELLIGENT EFFORTS.

P K Kothari

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TAX STRUCTURE IN INDIA

2007-12-23T07:00:00.000-08:00

1) Qus. : What are you doing?
Ans. : Business.
Tax : PAY PROFESSIONAL TAX!

2) Qus. : What are you doing in Business?
Ans. : Selling the Goods.
Tax : PAY SALES TAX!!

3) Qus. : From where are you getting Goods?
Ans. : From other State/Abroad
Tax : PAY CENTRAL SALES TAX, CUSTOM DUTY & OCTROI!

4) Qus. : What are you getting in Selling Goods?
Ans. : Profit.
Tax : PAY INCOME TAX!

5) Qus. : Where you Manufacturing the Goods?
Ans. : Factory.
Tax : PAY EXCISE DUTY!

6) Qus. : Do you have Office / Warehouse/ Factory?
Ans. : Yes
Tax : PAY MUNICIPAL & FIRE TAX!

7) Qus. : Do you have Staff?
Ans. : Yes
Tax : PAY STAFF PROFESSIONAL TAX!

8) Qus. : Doing business in Millions?
Ans. : Yes
Tax : PAY TURNOVER TAX!

9) Qus. : Are you taking out over 25,000 Cash from Bank?
Ans. : Yes, for Salary.
Tax : PAY CASH HANDLING TAX!

10) Qus.: Where are you taking your client for Lunch & Dinner?
Ans. : Hotel
Tax : PAY FOOD & ENTERTAINMENT TAX!

11) Qus.: Are you going Out of Station for Business?
Ans. : Yes
Tax : PAY FRINGE BENEFIT TAX!

12) Qus.: Have you taken or given any Service/s?
Ans. : Yes
Tax : PAY SERVICE TAX!

13) Qus.: How come you got such a Big Amount?
Ans. : Gift on birthday.
Tax : PAY GIFT TAX!

14) Qus.: Do you have any Wealth?
Ans. : Yes
Tax : PAY WEALTH TAX!

15) Qus.: To reduce Tension, for entertainment, where are you going?
Ans. : Cinema or Resort.
Tax : PAY ENTERTAINMENT TAX!

16) Qus.: Have you purchased House?
Ans. : Yes
Tax : PAY STAMP DUTY & REGISTRATION FEE !

17) Qus.: How you Travel?
Ans. : Bus
Tax : PAY SURCHARGE!

18) Qus.: Any Additional Tax?
Ans. : Yes
Tax : PAY EDUCATIONAL, ADDITIONAL EDUCATIONAL & SURCHARGE ON ALL THE
CENTRAL GOVT.'s TAX !!!

19) Qus.: Delayed any time Paying Any Tax?
Ans. : Yes
Tax : PAY INTEREST & PENALTY!

20) INDIAN :: can i die now??
Ans :: wait we are about to launch the funeral tax!!!

Tax-planning tips for 2007-08

2007-12-07T08:59:00.001-08:00

Wondering how to plan your taxes in the new financial year? Do you want your tax-planning to generate returns as well?

Want to know about short-term investments that also offer you rebate on income tax?

While tax can be saved on investments like insurance, mutual fund, fixed deposit and various other debt schemes, are you confused about the ideal mix?

Are unit linked insurance plans bad investment options? Are their returns not as good as other insurance products?

Get Ahead tax expert Mahesh Padmanabhan answered tax and investment-related queries in a chat with Get Ahead readers on April 25.

For those of you who missed the chat, here is the transcript.

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Paul asked, I want to know if LTA is allowed to teachers also. How much value is it?

Mahesh Padmanabhan answers, LTA or leave travel assistance is merely a component of your salary structure and is general in nature. There is nothing restrictive in its use in a segment manner for a certain class of employees. Yes, the basic condition, however, is that there should be an employer-employee relationship.

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phanichaganti asked, Hi my age is 27. Right now division of my tax savings is (Rs 100,000= Rs 25,000 (FD 5yrs) + Rs 28,000 (EPF) + Rs 30,000 (NSC) + remaining (MF). Is my way of investing good/bad/moderate?

Mahesh Padmanabhan answers, From your investment mix, you seem to be a very risk averse person as the debt component is very high as compared to the equity component.

Investment in debt securities is not a bad option but you need to consider the tax implication of the interest, liquidity of such investment, pre and post tax yield (returns), etc before deciding whether this investment mix is suitable for the growth of your wealth. Historically, equities have always scored higher in the long run.

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Krishna asked, Hi Mahesh, I am working in one of the company in a European country through business VISA through their branch in delhi, and my gross salary is Rs 10 lakhs. Please suggest how much I could invest for tax saving? Already I have been paying Rs 25,000 per annum through LIC. Also take into consideration that from April �08 I may go permanently to Europe through work permit visa. Please give your suggestions on the same. Thank you very much.

Mahesh Padmanabhan answers, I guess you are looking at a short-term fix for your current tax problem. In this case you can invest in ELSS (equity linked saving scheme), which has a lock-in period of about three years. You can also put your money in a five year FD. In case of life insurance, you are seriously advised to consult a financial/ insurance advisor to determine your insurance needs and accordingly go about putting your money in such insurance without taking a look at the tax perspective.

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RAGHAVENDRA asked, HI RAGHU HERE, AM EARNING RS 35K PER MONTH IN HAND, AND REQUEST YOU TO SUGGEST ME A GOOD INVESTMENT PLAN.

Mahesh Padmanabhan answers, Raghu, there is no single best plan available on a common platform; it all boils down to individual financial perspectives. However, if you are averse to taking risks, then go for debt tax savings instruments such as NSC, PPF, eligible FD etc or else go for ELSS mutual funds, ULIP schemes, etc. Additionally, you would also need to consider your long-term planning for various other aspects such as home acquisition, etc.

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sandhya asked, Hi ,My take home salary is Rs 15 k per month. Please let me know the best investment opportunities. I have already invested in FDs, RDs (recurring deposit) and NSC.

Mahesh Padmanabhan answers, In case your salary structure is absolutely unfriendly and the entire Rs 1.8 lakhs salary is taxable, then you need to put aside at least Rs 35,000 in certain tax saving investments to bring your tax liability to zero. Generally, RDs are not tax saving instruments and you will need to ensure that the FD that you have created is stamped by the bank for being eligible for tax savings purpose. NSC is a tax saving instrument.

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dip asked, Sir, I have invested around Rs 54,000 in 2 ULIP funds , ICICI prudential (Rs 24,000) and AVIVA life bond 5 (Rs 30,000). I know that investing a huge chunk of money in ULIPs was not a good idea but do you think I should persist with these investments.

Mahesh Padmanabhan answers, If someone has told you that investing in ULIP is bad, then the person is absolutely wrong. Yes, if you have done so without proper consultation with an advisor, then probably you might get involved with the wrong insurance company or the wrong plan.

Generally all insurance companies generate reasonable returns on ULIPs but the cost varies between companies, making the returns relatively up or down in comparison to peer companies. What you need to ensure is that you learn about the scheme you have invested in and see if you can leverage by moving from debt oriented fund to equity oriented fund or vice versa as per your risk profile.

Also, if you are unhappy with the scheme available as such then look at the escape route to get out of the insurance plan with as minimum damage as possible.

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Ravindra asked, Hi mahesh, I want to know about the investments that are short in time and also provide income tax rebate?

Mahesh Padmanabhan answers, The lowest time frame that you can probably look at is three years of lock-in. ELSS schemes, infrastructure bonds, etc, carry such time frame. But my sincere advice is do not be shortsighted in investing; the deductions that are provided are to promote retirement funding or to provide long term financial security/ means to individuals. Do not liquidate these investments unless the funds are required badly.

Also, invest your money with a proper strategy in mind after consulting a financial planner.

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ARPAN asked, What is an ELSS scheme?

Mahesh Padmanabhan answers, ELSS schemes are mutual fund schemes specifically aimed at tax investing with a lock in time frame of 3 years. These are essentially same as the regular mutual fund investments but are more focused and generally yield consistent returns. However, these are also subject to the vagaries of the stock market.

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Make Losses, Save Tax

2007-12-05T07:33:00.002-08:00

Negative income does not attract tax, but actually saves you money

Praful Poladia

Income tax is a tax on income earned by a taxpayer in a given year. However, each and every activity of a taxpayer may not result in positive income.

It may cause losses too. It would be unfair to tax a person on his income, while ignoring the loss. In recognition of this principle, there are elaborate provisions permitting adjustment of loss, including the provisions for carrying forward unadjusted (unabsorbed) loss to future years. Understandably, there are restrictions, which have been introduced to prevent misuse of artificial losses. Heads of income. Income of any assessee for the purpose of levy of income tax is computed under five heads—salary, house property, profits or gains of business or profession, capital gains and other sources. There are specific rules provided for computation of income under each of these heads of income. Considering the computation rules, no loss can occur under the head ‘salaries’.

Intra-head set off. Within each head of ‘income’, there could be more than one source of income. For example, a person may have two properties in different cities let out to different lessees. Each property is a source of income covered by the same head of income. The law requires adjustment of loss falling within the same head of income in priority of adjustment of loss against profits under any other head of income.

Some Basic Rules. Adjustment or carry forward of loss is not an inherent right. One requires specific provision in the Act permitting such right. But, once such a right is available, an assessee cannot, by choice, forego it in one year and choose to exercise it in the second year, when he expects a much higher income.

House property loss. Loss under the head ‘house property’ may occur when, say, in respect of a self-occupied house or a rented house, interest expenditure is incurred on the loan borrowed for acquisition of property. In case of a self-occupied house, income is computed as nil and interest expenditure results in loss. Any such loss can be set off against income from any other head, including salary income. If there is no sufficient income to absorb the loss, unabsorbed loss can be carried forward for eight years to be set off against house property income, if any, in the future year. It cannot be set off, in the future year, against any other income head like salary.

Business loss vs Salary income. Loss under the head ‘profits and gains from business or profession’ cannot be set off against salary income.

This restriction has been introduced very recently to plug the unhealthy practice of salaried employees claiming artificial business losses for the purpose of setting it off against salary income.

Business loss—Speculative vs normal. There is a distinction drawn between loss in speculative business and loss in any other business. Speculation loss can be set off only against speculation income. For example, loss from speculation in shares can be set off against income from speculation in commodities, but not against share brokerage income or salary income.

What is more, such speculation loss can be carried forward for a period of four years only. Even in those four years, it can be set off against income from speculation business only.

Business loss & unabsorbed depreciation. Business loss is divided into depreciation loss and operating business loss. Say, a person is engaged in the business of software development and training, which requires investment in computers eligible for depreciation at a higher rate of 60 per cent. He may become entitled to claim a large depreciation (Rs 10 lakh for example) while his profit before depreciation is low (Rs 2 lakh for instance).

Such loss (Rs 8 lakh) is known as depreciation loss.

The rules for carry forward of depreciation are different from rules for carry forward of unabsorbed business loss (see: Uneven Rules).

Loss under Capital Gains. Capital loss assessed under the head ‘capital gains’ cannot be set off against income under any other head. Capital loss can be set off against capital gains income only. Further, long-term capital loss cannot be set off against short-term capital gains. Unadjusted capital loss can be carried forward up to eight years. Long-term capital loss cannot be set off against short-term capital gains even during this period.

Loss under Other Sources. Loss under the head ‘other sources’ can be adjusted against income under any other head in the same year. But, there are no provisions for carry forward of unadjusted loss incurred under this head to subsequent years. Unabsorbed loss under this head will, therefore, lapse in the same year.

Set-off, as a tax-saving instrument, works only under certain conditions and is not always helpful

Submission of return within due date. One of the critical conditions for availing the benefit of carry forward of loss to future years is that the return of income for the year, in which loss has been incurred, should be furnished within the due date. This condition is applicable for carry forward of loss to next year and does not affect the right to adjust or set off loss in the same year. As a measure of relaxation, unadjusted depreciation can be carried forward even if there has been delay in furnishing the return.

Conclusion. Tax provisions about setting off losses are, indeed, a bit complex, but so is life. One needs to file income tax returns within the due date for availing the benefit of losses to reduce future tax liability.;

The author is a member of the Bombay Chartered Accountants’ Society

li’l club class travellers

2007-12-05T07:33:00.001-08:00

Your minor child’s income would be lumped with yours. So try to create tax-free income streams for him

Sunil Dhawan

A child can start earning from the day he is born. Someone can open a fixed deposit account in his name. That can be followed up with insurance policies, mutual fund schemes, real estate investments, and what have you. Now if a child is capable of owning assets, argues the taxman, there is no reason why he should not be paying taxes too.

snapshot

The parent who earns more annually pays tax on behalf of a minor child—their incomes are clubbed

MF dividends and PPF interest are tax-free, so if your child earns these, your tax liability doesn’t rise

Inheritances are not taxed in the hands of the kid

Since assets and income are actually being created on behalf of the child, taxes, too, have to be paid on his behalf. And the onus of doing so, according to the Income Tax Act, is on the parent with the higher annual income—the income of a minor child will be clubbed with his. The implication is simple: if you are trying to create assets for your child, try to ensure that the income from them is tax-free. And, for whatever it is worth, the I-T Act allows a deduction of Rs 1,500 per child from such clubbed income of a parent.

According to Lovaii Navlakhi, managing director and chief financial planner, International Money Matters, while it does not matter from the tax point of view whether the money is invested in the name of the parent or the child, it is still a great idea to create assets in a child’s name. That’s because parents are loath to withdraw investments for short-term needs if they are in the name of their child.

When the child is a minor, the interest earned on investments made in his name is taxed on accrual basis even if it is not realised. In most cases, that would be annually. Take National Savings Certificates, for instance. While the only payout is when the certificate matures, interest accrues annually. So, every year, the interest amount will get added to your income. It is important to keep this interest payout in mind when investing for your child.

So, what are the investments you can make for your child that will provide tax-free income? Equity mutual fund units are a good option. Another is a Public Provident Fund account. Dividends in the first case and interest in the second are tax-free and, therefore, will not add to your tax liability (see Funding Your Child’s Needs, page 38).

Gifts, in general, should be avoided. If you or anyone else gives your child a gift, it will be taxable in your hands because of income clubbing. But there are exceptions. Inheritances are not taxed in the hands of the recipient.

Nor are gifts given by a “close relative” out of “natural love and affection”. Relatives include brothers and sisters, brothers- and sisters-in-law, maternal and paternal uncles and aunts, lineal ascendants and descendants and their spouses. Also, make sure that there is no consideration for the gifts received.

If a child’s income continues when he has ceased to be a minor, he would have to file tax returns, even if his only earning is income from sources other than business or salary. He should also get a PAN number.

Get the edge

2007-12-05T07:32:00.002-08:00

Five ways with which you can effectively structure your loans and investments to reduce the tax burden

Kanu H. Doshi

“The way of taxpayers is hard and the legislature does not go out of its way to make it any easier.” Lord Curzon

Deduction on jointly-taken home loans is available individually to both the spouses

Lord Summer
Lord Summer’s aphorism about taxation remains true despite personal direct income tax rates having come down from the dizzy heights of 97.75 per cent in the 1970s to 30 per cent at present. The decrease in tax rates have also been accompanied by elimination of many routes for tax planning, most notably tax rebates, such as those under Section 88 and Section 80L. However, there still exist some provisions in the Income Tax Act, 1961 (Act) that contain some possibilities of reducing the personal tax burden. I suggest moves that may help you in the smart management of finances.

Smart Move
Apply jointly with your spouse for a home loan to claim larger tax deductions.
Section 24(b) grants deduction for interest up to Rs 1.5 lakh per year on a loan for acquiring a residential house. This deduction is available individually to both the spouses. To be eligible for the deduction, the home loan needs to be taken in joint names, property be owned and financed jointly in equal shares, with both spouses being joint owners. Needless to say, a joint loan application will also help a couple avail of a larger loan.

Smart Move
Get tax deduction for home loan interest repayments. Self-occupied residential properties can avail of another tax concession under Section 23(2) that provides that the notional income for the purpose of income tax for such properties will be deemed nil and yet the deduction for interest up to Rs 1.50 lakh will be available. In other words, there will be negative income (loss) from such property that will be available for set off against the tax payer’s any other income, including salary income. To put it differently, interest on borrowed money becomes tax deductible. If husband and wife both were to have an annual income of Rs 15 lakh each, they could claim an annual tax deduction of Rs 3 lakh (Rs 1.5 lakh for each) and save aggregate tax of Rs 1,01,970 (33.99 per cent of Rs 1.5 lakh multiplied by 2) between them. For convenience, they can file a declaration with their respective employers to deduct a specified amount of lesser tax at source from their salaries.

Smart Move
Claim tax deduction for principal repayment for home loan. Repayment of the principal amount of a housing loan is one of the tax concessions a taxpayer can enjoy under Section 80C. But unlike Section 24, this deduction is available only for repayment of the loan from an approved source like banks, HDFC, HUDCO or the employer company. The repayment of principal part of the loan qualifies for a deduction under Section 80C up to a maximum of Rs 1 lakh per year. In case of joint home loan application, this results in joint tax saving of Rs 67,980 (Rs 33,990 multiplied by two). But the biggest advantage in availing Section 80C deduction for repayment of housing loan is immunity from any adverse tax consequences of the proposed EET (Exempt, Exempt and Tax) system—where investments will get taxed on maturity, redemption, or sale. The simple reason for this is that by the very nature of the transaction (repayment of a loan), there is no question of “withdrawal’ of funds to attract tax, unlike in the case of National Savings Certificate (NSC), Public Provident Fund (PPF) or life insurance policies with cash values.

The growth option in MFs is a tax-efficient option for those trying to create wealth for kids

Smart Move
While investing for kids, opt for growth option in mutual funds (MFs). The growth option in MFs is a great tax-efficient option for higher net worth individuals trying to create wealth for their kids. With the clubbing up provisions of Section 64 in the Act, by which all incomes of minor children (under the age of 18 years) are to be added to the income of that parent (father or mother) whosoever’s income is higher, the scope of tax planning here is very limited. The growth option comes in handy in such cases. Here’s how.
The father could subscribe to a MF scheme with a large cheque of Rs 25 lakh and opt for growth option till the minor child attains majority. Under this option, the scheme does not declare any income distribution but merely accumulates it. Because the scheme does not declare any income, it does not pay income distribution tax (or dividend distribution tax) of 12.5 per cent, imposed by Section 115-R. The accumulated income of the scheme has the effect of enhancing from year to year the net asset value (NAV) of units held by the parents for the benefit of their minor children. When the child attains majority, the parents may transfer the units to the child and allow it to grow or encash the units (likely to be over Rs 1 crore) to fund future requirements such as higher education and marriage. This can be done without paying any gift tax (abolished from 1 October 1998) or any wealth tax (since units are exempt from wealth tax) or any income tax (since there is no income declaration).

Smart Move
Stocks: Buy cum-bonus, sell ex-bonus. Equity shares of listed companies that announce bonus shares present excellent opportunity to book short-term capital loss without effectively losing any money. Such loss is available for set off against any other capital gain, including long-term capital gain. The modus operandi goes like this. Let’s assume that a company’s shares are quoting

at Rs 2,000 per share on 20 June 2007. On 22 June, the company announces one bonus share for every one share held and declares 10 July 2007 as the record date for allotting bonus shares. A taxpayer buys 1,000 shares (cum bonus) on 25 June 2007 at Rs 2,000 per share and pays Rs 20 lakh for the same. On 11 July 2007, the price of the company’s share drops to Rs 1,000 per share and hence the taxpayer will sell 1,000 shares for Rs 1,000 per share and get Rs 10 lakh as sale proceeds. Since he was holding 1,000 shares on the record date (10 July 2007), the company will allot him 1,000 bonus shares. He bought 1,000 shares at Rs 2,000 per share cum-bonus and sold 1,000 shares at Rs 1,000 per share ex-bonus booking a short- term capital loss and yet in effect retaining his original holding of 1,000 shares. The loss, as indicated earlier, can be used for setting off against any other capital gain and can’t be contested by authorities since there is no legal bar on it.;

Taxing times ahead, are you on track?

2007-12-05T07:32:00.001-08:00

If you haven’t planned on taxes already, do it before it gets too late. Only, while doing this, decide whether you just want to save taxes or make goal-based investments

Sunil Dhawan

Two types of people complain about taxes: men and women. Every year, taxpayers try to save and invest so that they minimise taxes and maximise disposable income. Tax planning, as part of your overall financial planning exercise, helps you figure out how to make full use of the breaks on offer.

The ideal time to plan your taxes is in April, at the beginning of the financial year. But for those who couldn’t and are doing so now with just about four months to go for the year to end, there are still enough investment options that would substantially lighten the burden while deploying funds profitably.

Investment-related tax breaks. Finance Bill 2006-07 offers a deduction from income of up to Rs 1 lakh on specified investments, expenses or payments like notified bank deposits with a minimum period of five years, life insurance premiums, Employees’ Provident Fund (EPF), public provident fund (PPF), repayment of principal amounts on housing loans, payment of tuition fees, national savings certificate (NSC) and equity-linked savings schemes.

Bank deposits. The term deposits in a scheduled bank with a minimum period of five years under the Bank Term Deposit Scheme, 2006, in addition to giving you a fixed and assured return (around eight per cent) comes with a tax advantage. There is a one-time investment and there is no commitment to pay in future. Since the benefit of Section

80L (interest income up to Rs 12,000 from bank deposits and NSC were exempted) has been removed, the entire interest income from any such deposits would be taxable. State Bank of India (SBI) and HDFC currently offer 7.25 per cent interest over five years, while ICICI Bank offers 7.5 per cent.

EPF. This is a forced saving that happens in the life of an employee and helps him save for retirement. Twelve per cent of your salary is deducted every month and put into a kitty maintained either by the government or your company’s trust. The contribution currently earns a tax-free return of 8.5 per cent and is fixed by the government every year in March-April.

PPF. This is a self-directed investment option. It is essentially a 15-year investment that carries a tax-free interest rate of eight per cent as of now. The rate is subject to change. Investments of Rs 500-70,000 qualify for a tax rebate under Section 80C.

Home in on home loans. The interest payable on home loans taken on or after 1 April 1999 is tax-deductible up to Rs 1.5 lakh a year. If you factor in the tax advantages, the effective interest rate works out to 6.3 per cent for an eight per cent loan—against which you get to build a long-term asset. Those eligible for Section 80C benefits stand to gain even more. The total amount eligible for deduction under this section is Rs 1 lakh a year. and principal repayment of home loans up to that amount also qualifies.

Children’s fees. Under Section 80C, parents can also claim a deduction for tuition fees—up to Rs 12,000 per child—for a maximum of two children. This means that parents with two children can claim a deduction of Rs 24,000. However, any payment towards any development fees or donation to the institution are excluded.

National Savings Certificates. For those who are less averse to risk, there’s the National Savings Certificate. This government-backed security is available at post offices and comes with an interest rate of eight per cent, compounded half-yearly as of now. The interest is entirely taxable and is right for those in lower tax slabs with an investment horizon of around six years.

Equity-linked savings schemes (ELSS). It is eligible for a deduction under Section 80C. By investing in these schemes, those with a penchant for risk stand to gain from the benefits of equity market returns. Do note that like all tax savings options, these plans have a lock-in period of three years. ELSS does not allow moving out of the investment in case of market volatility, unit-linked insurance policies (Ulips) allow this, through their switching facility.

Life insurance. The premium that you pay towards a life insurance policy is eligible for a tax deduction up to Rs 1 lakh under Section 80C. If the premium paid in any of the years during the term of the policy is more than 20 per cent of the sum assured, then deduction will be allowed only for premiums up to 20 per cent of the sum assured. This applies to all term, endowment or unit-linked plans bought from any of the 14 private life insurance companies as well as from LIC.

Health insurance. Under Section 80D, medical insurance premium of up to Rs 10,000 is tax-deductible, with an additional deduction of up to Rs 5,000, where the premium is paid by a senior citizen (65 years or older).

Pension plans. If you have a pension plan with a premium of more than Rs 10,000, you can now claim that under Section 80CCC. If any investment has been made under this section, then the qualifying amount under Section 80C will stand reduced to that extent.

What to do: Risk and return have a close relationship with each other and is an important pillar in building wealth over a long time. An investment under Section 80C is a step towards that. Removal of sectoral caps this year on investments for tax-planning purposes means that investors can invest in line with their risk appetites and needs.

However, investments in tax instruments should never be done merely to save taxes. The choice of an instrument is as important as the amount of tax saved. Liquidity is a crucial factor in all the instruments and, hence, short- and long-term objectives should be clear before you lock your funds in them. the value derived through liquidity, returns and security over the next few years should be an integral part of your investment decision.

If your immediate need is only to save taxes and your investment horizon is not very distant, then ELSS would be suitable. Remember, the risk involved is high too. If you can commit to pay regularly for a longer duration, Ulip would be a better option. A risk-averse investor can select small savings schemes like PPF or the bank deposit with assured return on investment.

Finally, having made your investments and claimed the tax breaks, don’t forget to keep the records and documents of your investments and tax deduction certificates, since you will have to attach them with your returns.

30 Minute TAX GUIDE

2007-12-05T07:31:00.000-08:00

Calculate your income, find the deductions, and work out your tax. In a matter of minutes

Swami Saran Sharma and Udayan Ray

The hardest thing to understand in the world is income tax.
Albert Einstein

For most of us, Albert Einstein needs no introduction. And when the man who changed the course of mankind with his scientific thinking expresses his exasperation about a subject, you are bound to take it seriously. You are entitled to ask that if taxation confounded an intellectual colossus like Einstein, what hope would ordinary folks have. But the irony of taxation is that it is an integral part of our lives. Probably that’s why another genius, Benjamin Franklin, opined: “In this world nothing is certain but death and taxes.”

Such gloomy views on the subject obviously didn’t develop overnight for the story of taxes and the civilised man go back a long way. Taxes were levied when Pharaohs ruled Egypt 5,000 years ago. In India, a treatise on taxation existed 2,300 years ago in the form of Chanakya’s Arthashastra. It emphasised on fairness and equity, recommending that the affluent pay higher taxes as compared to the not so fortunate.

The modern system of Indian taxation started taking shape from the year 1922. After Independence, the Income Tax Act in its present form was passed in 1961. For the purpose of taxation, the total income of an individual’s income has been divided under five heads: salaries, house property, profession, capital gains and other sources. A number of deductions are allowed from the gross total income computed on the basis of individual income accruing under the five heads. The deductions allowed are usually in line with the fiscal policy of the government. For example, when the government wanted to promote investment in the housing sector, annual exemption up to Rs 1.5 lakh was allowed on interest repayment for home loans.

It is probably fair to say that the increase in the importance of taxation coincided with the enlarged role of the government, a phenomenon that came to the fore in the twentieth century, especially after the Great Depression of the 1930s. Governments across the globe had to enormously increase their spending to create employment and catalyse economic activities that would help out their citizens suffering in depressed economies. Governments were now much more than the police states of the preceding centuries, where their primary focus was on defence and maintenance of internal law and order. So, governments were setting up banks, industries, schools, universities, hospitals and, in many cases, handing out old age and unemployment doles. In the decades since then, governments may not have been as active in all the areas but they continue to spend large amounts of money raised primarily as taxes from individuals and companies. This, then, begs an important question. If taxes are for our collective good, why do most of us hate them so much? Two reasons immediately come to the mind.

First, at a subconscious level, we probably see it as diminution of our freedom—the freedom to do what we please with our hard-earned money. Second, the language of taxation is understood mostly by experts and intimidates laypersons, who see it as a complicated subject. It is this second aspect that we hope to address in this special issue on taxation. We have designed a package that will help you understand, calculate and pay your taxes with unprecedented ease—all in just 30 minutes.

We break the whole tax paying process into three parts: calculating your total income, figuring out the deductions to arrive at the taxable income and, finally, paying your taxes. Our primers and interactive worksheets will help you in comprehending the basics of taxes. We are aware that tax saving investment options are of great interest to our readers. This is more so with the deluge of equity-linked savings schemes (ELSS) from mutual funds and pension plans from life insurance companies in the recent past. We help you pick the best ELSS schemes and life insurance pension plans. We also give you insights into the two pension schemes provided by mutual funds. The tax on the earnings made by our investments can make a crucial difference in the long term, especially in retirement. We provide you a guide map to help you make your investments more tax efficient so that they provide better returns.

In sum, this special edition of Outlook Money will empower you to be better informed about taxes. You might still need expert and customised advice from a chartered accountant, but you will be aware of what he is doing for you and your tax planning would be a more participative process. Hopefully, you would have gone a long way in cracking a problem that even Einstein couldn’t.

Calculate your income

2007-12-05T07:30:00.001-08:00

It takes 10 minutes to find out your Gross Total Income

Sunil Dhawan and Swami Saran Sharma

“I’m spending a year dead for tax reasons.”

This is what the tax noose made English writer Douglas Adams say. Many, like Adams, would do anything to escape the pain of taxes. While knowing the tax process does not take the pain away, it does give a better grip on the tax cuts that we get. For incomes to be taxed, they first need to be classified under various categories to allow us to count them better. Incomes like those from agricultural activity and dividends (from mutual funds and stocks) are not part of income that is counted for taxation. Incomes are classified under five heads in India. Here’s a quick guide to doing what you believed was too tough for you. This is not an exhaustive list of what you can include under each head, but you would be 90 per cent there. For the rest, call the friendly neighbourhood CA.

Salary income

First, you have to find out the “income chargeable under the head salaries”. For this, you need to know your gross salary, which normally includes basic salary, commissions earned, taxable allowances, taxable perquisites and retirement benefits. Subtract certain deductions like conveyance allowance (upto Rs 800 per month) from this. The balance is charged under the head salary income.

Total taxable income. Your ‘basic salary’ is fully taxable. Further, any amount of dearness allowance, commissions and bonuses, city compensatory allowances, overtime allowance and even lunch allowance that you get is fully taxable.

House rent allowance (HRA): HRA is exempted up to a certain limit provided you are actually paying house rent. The lowest of three amounts, actual HRA received or rent paid in excess of 10 per cent of basic salary or 50 per cent of your basic salary (40 per cent of your basic salary if you reside in a city other than Mumbai, Kolkata, Delhi and Chennai), would determine how much is to be exempted. The balance is taxable.

Conveyance allowance. Up to Rs 800 per month is exempt from tax.

Leave travel allowance (LTA). This is a reimbursement for travel expenses that you and your family members incur within India while you are on leave. While LTA can be paid to you every year, it is treated as tax-free only for two journeys in a block of four years. Both these journeys can be made in any one of the four years or spread out over the four years.

Medical allowance. Reimbursement of medical expenditure incurred by you and your family is tax-free to the extent of Rs 15,000 per annum. Remember, all reimbursements need to be supported by bills or other documents.

Perquisites. Perquisites are benefits that your employer gives you in addition to your regular salary. These are usually in the form of accommodation or car or concessional loans. The total of all perquisite values is added to the salary and tax is calculated on the usual slabs. Premium paid by your employer under group insurance or medical insurance premium paid by your employer escapes the tax net. However, you need not worry about calculating all this. Your employer will give you Form 12 BB which will show you the value of perk as part of your salary.

You will also get Form 16, which shows the ‘income chargeable under the head salaries’ and TDS, taking into account all the allowances and deductions. If there is no deduction of tax at source for you, your employer will give you a certificate of salary earned during the financial year instead of Form 16. American journalist Bill Vaughan had remarked, “The tax collector must love poor people, he’s creating so many of them.” You might want to agree after seeing what taxes have done to your income.

Income from house property

Rental income from a residential or commercial property that you own is liable to be taxed. Even if the property is not rented out (see Let Your Second House Pay For Itself, page 64), it will be treated as rented out and the rental income will be liable to be taxed. What is taxed under this head is not the actual rent but the inherent capacity of the property to earn income. This is known as the property’s “annual value”. The gross annual value is the highest of these: the municipal value, the actual rent, or the fair rental value. To calculate your gains, see the worksheet. Preferential treatment is given to one self-occupied house which has not been let out at any time. In this case, the annual value is taken as ‘nil’. The interest payable on home loans taken on or after 1 April 1999 is tax-deductible up to Rs 1.5 lakh a year.

Capital gains

If you hold a house, commercial property, gold or silver for more than 36 months, they are termed as long-term assets. If you hold them for 36 months or less, they are short-term assets. However, shares and units of equity mutual funds are short-term assets if you hold them for a year or less and long-term assets if you hold them for more than a year. To calculate your gains, see the worksheet. Short-term capital gains are included in your gross total income and, after deductions, are taxed as per your tax slab. Other than for listed securities, long-term gains are taxed at 20 per cent with indexation. Gains from equity shares or units of equity mutual funds are tax-free in the long term and taxed at 10 per cent in the short term.

Gains from business and profession

Income earned from your profession, or through business, is taxed under the head ‘profits and gains from business and profession’. The income chargeable to tax is the difference between gross receipts and the expenses incurred to earn that income. A person carrying a profession of law, medicine, engineering, architecture or technical consultancy, whose total gross receipts from that profession exceed Rs 1.5 lakh per annum, is required to maintain books of accounts.

Other incomes

Any income that does not fall under the four heads of income mentioned above is taxed under the head ‘Income from other sources’. An example of such income is interest from bank deposits or national savings certificates.;

Calculate your Deductions

2007-12-05T07:29:00.002-08:00

You can reduce your taxable income by investing in specified instruments. You can work that out in 15 minutes

Sunil Dhawan and Swami Saran Sharma

“If you beat us in a game of cricket, we will forgive your tax for three years. If you lose, you’ll have to pay triple the taxes.”

This was the condition the British administrator put before Bhuvan (Aamir Khan) in the film Lagaan. The Lagaan episode holds true even for you! Some of your tax is waived if you invest in specified areas. This is the crux of allowing deductions from your gross total income. The smaller the income on which tax is levied, the lesser is the tax. Under Section 80C of the Income Tax Act, you can reduce your total income by up to Rs 1 lakh by making specified investments. There are other sections of the Act as well wherein you can reduce your total income. These investments are mentioned below.

section 80C products

Bank deposits. Term deposits in a scheduled bank with a minimum period of five years notified under the Bank Term Deposit Scheme, 2006, not only give you a fixed and assured return (around eight per cent), but also a tax advantage. Term deposits are a one-time investment and there is no commitment to pay in the future. But remember that the entire interest income from such deposits is taxable. State Bank of India (SBI) and HDFC currently offer 8 and 7.75 per cent interest, respectively, over five years, while ICICI Bank offers 8.25 per cent.

Employee Provident Fund (EPF). This is a forced saving for employees and helps them save for retirement. Every month, 12 per cent of your basic salary is deducted and put into a kitty maintained either by the government or your company’s trust. The contribution currently earns a tax-free return of 8.5 per cent. The rate of return is fixed by the government every year in March-April. Your employer also pitches in with 12 per cent of your salary every month. Of this, 8.33 per cent is diverted to your pension fund, the remaining amount is put in the provident fund.

Public Provident Fund (PPF). This is a self-directed investment option. It is essentially a 15-year investment that gives a tax-free return of eight per cent as of now. The rate is subject to change. Investments of Rs 500-70,000 qualify for a tax deduction under Section 80C.

Home loans. The total amount eligible for deduction is up to Rs 1 lakh a year for the principal amount.

Children’s fees. Parents can claim a deduction for tuition fees for a maximum of two children within the overall limit of Rs 1 lakh. However, payment towards development fees or donations to the institution are excluded.

National Savings Certificates (NSC). These are for those who are less averse to risk. This government-backed security is available at post offices and gives an interest rate of eight per cent, compounded half-yearly as of now. The interest is entirely taxable. NSCs are good for those in lower tax slabs with an investment horizon of six years.

Equity-linked savings schemes (ELSS). These are mutual fund products and carry market risk. Like all tax saving options, these plans have a lock-in period of three years. Therefore, it makes sense to go in for funds with good track records rather than the new fund offers, especially in this category. Choose the ‘growth’ option for an optimal investment (see Get Tax Sops, Reap Returns, page 38).

Life insurance. Your life cover premium is eligible for a tax deduction up to Rs 1 lakh under Section 80C. If the premium paid in any of the years is more than 20 per cent of the sum assured, then deduction will be allowed only up to 20 per cent of the sum assured. This applies to all term, endowment and unit-linked plans.

Pension plans. If any investment is made under this section, then the qualifying amount under Section 80C stands reduced to that extent. Investment in insurance and mutual fund pension plans also comes under this section with an overall limit of Rs 1 lakh.

other deductions

Health insurance. Under Section 80D, medical cover premium is tax-deductible up to Rs 10,000, with an additional deduction of up to Rs 5,000 if the policy is in the name of a senior citizen (65 years or older) and the premium is paid by him. If someone below 65 buys a plan for his dependents, he can avail benefit upto Rs 15,000.

Educational loan. The interest on loans taken for higher education are also eligible for deduction from your total income under Section 80E. There is no monetary ceiling on the interest you can claim as a deduction. The loan must have been taken from a financial institution or an approved educational institution. Remember, repayment of loan or interest on loans taken by parents for higher education of their child is not eligible for deductions.

Charity. To avail tax benefits under Section 80G, donations must be made only to specified trusts. The tax breaks vary according to the trust to which you have donated.

Medical treatment. Any expenditure for the medical treatment (including nursing) of a handicapped person, training and rehabilitation of a person suffering from a permanent physical disability (including blindness) or from mental retardation, qualifies for a deduction under Section 80DD upto Rs 50,000. A life insurance policy bought for the benefit of such a handicapped person is also eligible for this benefit up to Rs 50,000. In case the disability is severe, the claim can go up to Rs 75,000.

What to do. US radio comedian Fred A. Allen once said, “An income tax form is like a laundry list—either way you lose your shirt.” The law, indeed, takes its own course, and cares little whether you are left with your shirt on or not. But the law just became better this year, by removing caps on investments in the avenues mentioned above, except for PPF, where deductions are available only up to Rs 70,000. Thus, investors can invest in line with their risk appetites and needs.

Investments in tax instruments should never be done merely to save taxes. The value derived through liquidity, returns and security over the next few years should guide your investment decision.

The Income Tax Act does not treat all kinds of savings uniformly—the taxability of contributions, accumulations and withdrawals differs from one instrument to another. In a PPF scheme, for instance, you can avail deductions, and the interest and the money you get on maturity is not taxed. This is the ‘exempt-exempt-exempt’ (EEE) method of taxation, since all three stages—contribution, accumulation and withdrawal—are exempt from tax.

On the other hand, while contributions to, and accumulations in pension plans are not taxable, lump sums withdrawn or periodical pension are taxed in the year of receipt. This is the ‘exempt-exempt-tax’ (EET) method of taxation.

Don’t forget to keep the records of your investments and tax deduction certificates, since you will have to attach them with your returns.

If you think the tax rates are skewed, American explorer Jeff Rich will give you company. He said: “We are all are equal, but some pay higher tax rates than others.” And you thought tax was invented to make life fair for everybody.

Calculate your Tax

2007-12-05T07:29:00.001-08:00

It is now just a five-minute sprint to calculating your tax liability

Sunil Dhawan and Swami Saran sharma

“When there is an income tax, the just man will pay more and the unjust less on the same amount of income.”

Greek philosopher Plato left this world about 350 years before Christ, but in this quote, he said something that would apply at all times, in all lands. When you add the incomes under all the five heads and account for the deductions to get your total taxable income, the amount on which you have to pay tax, Plato’s quote might find an echo in your mind too. There’s some relief for those with an annual income of Rs 1 lakh or less—they don’t have to pay tax. The limit is Rs 1.35 lakh and Rs 1.85 lakh for women and those above 65 years of age respectively. The tax payable at different income levels is shown in the table. Remember, filing of return is compulsory if your taxable income exceeds the basic limit indicated above, even if the tax payable is nil. You need to file returns even if you have incurred losses as a businessman or professional.

A surcharge and an education cess is levied on the amount of tax payable. The surcharge is 10 per cent of the tax amount and has to be paid if your annual income exceeds Rs 10 lakh. The education cess of 2 per cent has to be paid if your annual income is above Rs 1 lakh. These charges push the tax rate of 10 per cent to 10.2 per cent, 20 per cent to 20.4 per cent and the highest tax slab to 30.6. For those with income exceeding Rs 10 lakh, the rate becomes 33.6 per cent, including surcharge and education cess.

If the tax already deducted by your employer (TDS) is more than the tax payable, you are eligible to get a refund of the excess amount. Mention the details of your bank account in the tax form so that the refund gets credited to it.

The fundamental rule of income tax is that tax becomes due as soon as income is earned. In the case of salaried employees, tax is deducted every month after estimating the total income for the year and accounting for deductions. As far as business income is concerned, it is difficult to estimate income from day-to-day transactions. Therefore, tax is charged on estimation of income basis. As a thumb rule, if your income from a business or profession comes to Rs 100 at the end of a financial year, the income tax department assumes that Rs 30 (30 per cent) of it accrued up to September, Rs 60 (60 per cent) accrued up to December and the total income, that is, Rs 100, accrued till March. You are supposed to match this income pattern while depositing self-assessment tax. You will have to pay a penalty in the form of interest on the due amount if you don’t pay, pay less, or defer paying the advance tax. Don’t worry if you have paid all the taxes, but not filed your return by the due date, as the IT Act permits you to file the return till the end of assessment year. However, if you don’t meet this deadline too, you are liable to pay a penalty of Rs 5,000.

American Novelist Herman Wouk said, “The only imaginative fiction being written today is income tax returns.” Our advice: do your bit as a responsible citizen of the country, pay taxes on time, stay away from fiction, and relax.

Look beyond the tax breaks

2007-12-05T07:20:00.000-08:00

Consider flexibility, performance and prospects before buying a pension plan

Sunil Dhawan

It is a happy combination. Pension plans from life insurance companies not only help you save for retirement, but also help create regular retirement income from the accumulated sum . Tax deductions make them a potent investment tool—investments up to Rs 1 lakh qualify for deductions under Section 80C.

Evaluate the investment proposition. For long, pension plans have been sold primarily as a tax-saving tool that provided life insurance. The practice still continues. Since you can get a cost-effective cover from term plans, opt only for pure pension plans. With retirement life in India, on an average, stretching to more than two decades, pension investing is becoming crucial. Also, with a large choice of pension plans, all offering tax deductions, it is important that investment prospects of pension plans are compared.

Participatory policies: security’s flip side. Till a few years back, most pension plans were with-profit or bonus-based. In such plans, the insurers bear the investment risk. Your investment is not at risk, and your returns vary with the profits and surplus, depending on the investment performance of the insurer. But the flip side is that these policies don’t disclose the investment performance and the costs incurred on fund management or administration. So, you make do with what is offered. Also, since such plans don’t invest in equities, which typically provide high returns in the long term, their returns are in the range of eight per cent. Participatory policies might work for extremely risk-averse people with low income. It may even work for those who want to use it to create a base retirement income, supplemented by income from other sources. But, most of us need the equity exposure that unit-linked pension plans (ULPP) provide.

The unit-linked advantage. In the past three to four years, life insurers, especially private players, have been launching unit-linked plans. They are becoming popular due to their features that provide flexibility. In a ULPP, you have to manage the investment risk yourself. Therefore, if retirement is quite some distance away, it makes sense to take higher risk options in such plans, especially exposure to equities. Of course, in this backdrop, you won’t be able to put a finger on what you will end up with. Therefore, it becomes important to carefully evaluate the plans based on various parameters.

ULPPs. The amount of money that a person invested in a ULPP, and will end up with during retirement depends on three factors—costs such as those for management and administration, fund management performance and the market growth over the years. Costs are important as they eat into your premium contribution before the remainder can be invested. Thus, the lower the costs, the better the chances of higher accumulation. Various companies structure or spread the costs differently during the tenure of their plan. The structuring may even differ with plans from the same company. Out of the three factors, while fund management and market growth are prospective in nature and beyond your control, you can research on the cost structure of various ULPPs—information that the insurance advisor can give you—before you invest. Given the cost structure, you can project the retirement corpus you will need at the get at the end of the tenure. Since most of the ULPPs right now have a very short track record, it makes sense to supplement it with the fund performance to find out whether the company can really deliver on its projections. An important point to remember here is to factor in the equity exposure since it makes a difference to the returns. For instance, while Aviva has a maximum equity exposure of 60 per cent; it is 100 per cent for HDFC Standard Life.

Considering plans with the highest equity exposure from six top life insurers (in terms of their market share), we find that among plans with 100 per cent equity exposure, HDFC Standard Life’s plan comes right on top with the best projected value. It has shown consistency in returns and has the maximum exposure to equities. Of the two other companies providing plans with lower equity exposure, the choice is not a clear one.

By now, it will be clear to you that in the future, you will have to do much more than just take the easy route of investing in a pension plan to save taxes. You will have to take an informed decision on the prospects. With the right amount of homework, you can ensure that you get a lot of happiness out of the happy combination pension plans provide.

Combo on offer

2007-12-05T07:19:00.000-08:00

Take a look at funds that offer a combination of tax savings and pension after retirement

Kayezad E. Adajania

If you thought equity-linked savings schemes (ELSS) were the only mutual fund (MF) products you could invest in to save tax under Section 80C, here’s a surprise. Mutual fund pension plans, targeted towards your retirement corpus, can also help you in your tax planning. These are debt-oriented balanced funds that take equity exposure of up to 40 per cent (as opposed to 65 per cent equities in regular balanced funds), while keeping the remaining in ‘safer’ debt instruments.

Currently, there are two MF pension plans on offer—Templeton India Pension Plan (TIPP) and UTI-Retirement Benefit Pension Fund (UTI RBPF). Both these schemes offer section 80 C tax benefits.

For instance, if your taxable income is Rs 3 lakh, and if you invest Rs 1 lakh in TIPP or UTI RBPF, your taxable income comes down to Rs 2 lakh. As these schemes target your retirement, they mandate that you stay invested till the age of 58. Early withdrawals attract a high exit load. Of the two, we suggest you take a look at TIPP.

Consistent performance

TIPP has shown consistency over a long period of time. Over the past three and five years, TIPP returned 16.1 and 20.1 per cent, respectively, as against 15 and 17 per cent for corresponding periods by UTI RBPF. We took the standard deviation (SD) of all balanced funds for the past three years and checked out the extent of fluctuation of the scheme’s returns from that of its average return for the same period. TIPP has the lowest SD and stands third on the risk-adjusted returns (RAR) charts.

On the other hand, UTI RBPF, in the past year, has managed to return only 7.7 per cent despite investing 15-20 per cent in equities. Even a one-year bank FD earns eight per cent. Besides, the fact that the fund, which can invest up to 40 per cent in equities, is benchmarked against the Crisil MIP Blended Index (that has 15 per cent allocation to equities) doesn’t work in its favour.

Regular dividends

Once you turn 58, you can either withdraw the full amount (without exit load) or choose to receive a pension in the form of dividends. If you choose dividends, you are entitled to receive dividends in the form of pension. TIPP has consistently given an average of 12 per cent dividend per annum for six years now. Even if you choose the dividend option at the time of investment, you will start receiving dividends only once you turn 58.

Portfolio

TIPP has consistently maximised its equity investments. As per its December 2006 portfolio, its top three sectors are banks, information technology and auto companies. It also invests in debt scrips of high credit quality.

How the Funds Have Fared
Returns (%)
Scheme NAV (Rs) 1 Year 3 Years 5 Years
TIPP 44.2 19.5 16.1 20.1
UTI RBPF 19.7 7.7 15 17
As on January 16, 2007

Get tax sops, reap returns

2007-12-05T07:18:00.001-08:00

That’s what ELSS investments have to offer, coupled with other benefits

Sunita Abraham

Taxing times are here again. For most of us, this would mean parking more money in PPF or NSC to earn tepid returns, just to claim the tax break. This year, if you are looking to save tax and earn relatively higher returns, we suggest you take a look at Equity Linked Saving Schemes (ELSS). Coupled with other benefits such as shorter lock-in periods and tax-free dividends, the ELSS is definitely worth a slice of your Section 80C investments.

WHY ELSS?

ELSS is like any other diversified equity fund but investors can avail tax benefits, provided the investment is locked-in for a period of three years. How do these schemes stack up against other instruments permitted for tax planning?

The best performing ELSS scheme gave a three-year return of 64.5 per cent, while the worst performer in the period gave a return of 19.88 per cent. The eight per cent return from PPF and NSC hardly compare. ELSS scores on the liquidity front too, with a lower lock-in of three years compared to the PPF’s 15 years and six years of the NSC.

Unlike assured return schemes, ELSS does not guarantee returns, but if you are comfortable with taking a moderate risk for higher returns, ELSS is just the product for you.

WHICH ELSS?

Outlook Money offers you a shortlist for selecting the ELSS that is ideal for you. While the category as a whole has given impressive returns, we have selected five schemes that are definite candidates in any selection process. To remove period bias from the return, rolling returns were considered to shortlist these schemes. Other factors such as portfolio composition and risk-adjusted return (RAR) were considered to ensure that the risk is lower.

Franklin India Taxshield. This scheme, which has given steady returns since its inception, makes the grade on consistency. It is suitable for investors who are not looking for fireworks in their returns and are uncomfortable with volatility. It has a comparatively lower exposure to mid-caps and that explains the lower returns of 34.49 per cent that the fund has generated in the three-year period as compared to its peers. There is a high degree of concentration in the portfolio with the top five holdings constituting a huge 29.76 per cent and the top three sectors constituting almost 50 per cent of the portfolio. This exposes the scheme to the risk of under-performance by these companies/sectors.

HDFC Taxsaver. This is a star performer from the HDFC stable. In the one-year and three-year periods, its returns were 33.92 per cent and 51.70 per cent, respectively.

The scheme has a large-cap focus with the flexibility to move to other segments. This has helped the scheme generate good returns in most scenarios. It has a new fund manager and it remains to be seen if the fund will continue its past excellence.

Principal Tax Savings Fund. Principal tax saving scheme has rewarded investors with returns of 43.87 per cent, 41.99 per cent and 48.59 per cent, over one, three and five years, respectively.

The fund has consistently outperformed the category average by a wide margin since the portfolio was recast in 2004-05 to have greater exposure to mid- and small-cap stocks. Holding in individual companies do not exceed five per cent and top five companies constitute only 22 per cent of the now diversified portfolio. The smaller size of the fund, at around Rs 176, crore makes for easier implementation of fund management strategies.

Prudential ICICI Taxplan. This is the scheme for you if you are comfortable with higher risk for higher returns. With a portfolio that has more than 90 per cent in small- and mid-cap stocks, the fund gave excellent returns in 2004 and 2005 when these sectors outperformed the broader markets.

The fund returned 44.95 per cent in the last three years and 51.90 per cent in the last five years. With a one-year return of 25.92 per cent, the scheme has under-performed due to the poor run that the mid- and small-caps have had in the last six months.

The corpus of Rs 574 crore makes it one of the larger schemes. Finding avenues in the mid- and small-cap segment to deploy funds may become an issue.

SBI Magnum Tax Gain Scheme 93. This scheme finds a place in the best tax savings schemes on the strength of its outstanding performance in the last two years. The scheme turned the corner in 2003, with a shift in focus to mid-cap stocks, and has since outperformed the benchmark as well as peers by a wide margin. It has given returns of 44.55 per cent, and 64.51 per cent in one- and three-year periods.

The fund has now reduced mid-caps and increased large-cap stocks in the portfolio though mid-caps continue to have a dominant share. The scheme is suitable for investors comfortable with some volatility in returns.

The growth in the corpus, which stood at Rs 1,163 crore in December 2006, makes the fund less nimble, especially when investing in mid- and small-cap stocks, and the change in the management team since last year are triggers that the investor must watch out for.

WHEN TO BUY ELSS?

Timing entry into these schemes to take advantage of dividend declarations or lower NAVs when markets fall is not a sustainable strategy. Ideally, use systematic investment plans (SIPs) as they work to your advantage in a volatile market and a small investment made periodically is less heavy on the pocket than a lump sum one-time investment. Most SIPs can be started with an initial investment of Rs 5,000 and periodic investment of Rs 500.

ELSS provides the booster in returns to your tax planning. The ELSS, with its three-year lock-in, imposes a long-term investing discipline. However, the lock-in also has a flip side. If you make a wrong selection, you do not have an exit option for three years. This is where an existing scheme scores over a new fund offer as it gives you an idea of the efficiency of the fund management in good and bad markets.

The road ahead for your tax investments is clear. Evaluate and select a scheme, start an SIP, and have a well-balanced tax-planning portfolio.

Tax Axe on Investments?

2007-12-05T07:16:00.000-08:00

Being an investor, and not a trader, makes a whole lot of difference to the tax liability of a person. We look at the tax implications that different investments have

Anil J. Sathe

Investors can choose from a variety of instruments and assets. While making the choice, they should also consider the tax axe that will fall on their investment. We take up the tax implications of investments here.

Types of Income. There are two types of income. One is earned from an asset while the investor holds it, say, interest, or dividend. The other is the gains or losses arising due to the transfer or relinquishment of the investment or asset.

Determinants of tax liability. To ascertain your tax liability, you need to ask yourself four questions:

Is the income from the asset exempt or entitled to deduction? For what period of time have you held the investment?

Under what head is the income taxable: capital gains, business income, or income from other sources?

What is the rate of tax applicable to the income?

It is the third question that creates the largest number of controversies. If a person treats his asset like a trader treats his stock, he will be assessed under the head business. If not, he will be assessed under the head capital gains or income from other sources. In this article, it has been presumed that the reader is an investor and not a trader. With this in mind, we analyse some popular categories of investments/assets. Education cess and surcharge, wherever applicable, are charged over and above the rates of tax. If a special rate does not apply, the income will be included in the income of the person and taxed according to the slab applicable. This has been mentioned as the normal rate.

Equity shares. You earn dividends while you hold an equity share. Dividends distributed by all domestic companies are exempt from tax. The tax on the income from sale or transfer of shares depends on whether they are a capital asset or stock (business asset). Some points that may be considered while deciding whether a person is an investor or trader.

Intention of the person;

The frequency of transactions during the year;

Whether the acquisition is being made with own funds or borrowed funds.

There are no definite guidelines in this regard. If the transactions are numerous and the individual has borrowed, there is a possibility of his being treated as a trader. In this case, the income will be taxed under the head business income and the period of holding will be immaterial. However, if the person is treated as an investor, the asset will be taxed under capital gains and the period of holding will determine his tax liability. If the share is held for one year or more, it will become a long-term capital asset. In such a case, if the share is listed and sold through a stock exchange, the transaction will attract the security transaction tax (STT). Apart from STT, the income from the transaction will be exempt. Other shares, like those of an unlisted private limited company, will attract 20 per cent tax. In case the equity share is listed and held for less than 12 months, it will attract 10 per cent tax, or the normal rate of tax depending on whether STT has been charged on the sale or not.

Mutual funds (MFs). Income distribution of MFs is exempt from tax. In most cases, an MF unit will be treated as a capital asset and not as stock-in-trade. If the fund is equity-oriented, then a gain on the transfer of a unit held long-term will be exempt. If it is held for short term, the gain will be subject to 10 per cent tax. In case of debt funds, the gains will be taxed at 20 per cent if the unit is held for long term, and at normal slabs if it is held for short term.

Derivatives. A derivative is a contract which confers the right to purchase or sell an underlying asset at a predetermined price at a future date. The asset can be the index (BSE Sensex or NSE Nifty), an equity share or a commodity. Such a derivative is called a “future”. A derivative in India is required to be settled by receipt/payment of difference.

The settlement of differences in respect of derivatives isn’t treated as speculation, and the income is taxed as either business income or income from other sources/capital gain. Derivative contracts need to be settled in less than 12 months and are, therefore, short-term assets. If there is a gain, the head under which the income is taxed is immaterial as no concessional rate of tax will apply and the income will be taxed at the normal rate. A loss, however, can be carried forward to the next year if treated as a loss under the head business or capital gain. Taxability will depend on whether the taxpayer is treated as an investor or a trader.

Gold/silver/precious metals. Gold is treated as a capital asset and the gain/loss from its transfer is taxed under the head capital gain. The gain/loss is computed under the head business only in case of jewellers or people who trade in precious metals. Investors will be also liable to wealth tax during the period that they hold gold/silver, subject to the overall exemption limit of Rs 15 lakh.

Paintings. If a painting is purchased for personal enjoyment, the gain from its sale is exempt from tax. However, if paintings are accumulated systematically with the intention of selling them at a later date, the gain from their sale will become chargeable as a capital asset. If the volume of acquisition or the frequency of sale is substantial, the gains may be treated as business income.

Real estate. Except in rare cases, gains from real estate are taxed under the head capital gains, with the rate depending on whether the period of holding is short-term or long-term. In rare cases, however, the real estate transactions may be treated as a business activity with the consequent gain/loss being regarded as business income.;

The author is a member of the Bombay Chartered Accountants’

Senior Citizens Savings Scheme

2007-11-25T07:41:00.001-08:00

Senior Citizens Savings Scheme

Who can apply
The scheme is available for citizens above 60 years of age; however a provision has been put in place for individuals who have crossed 55 years of age. Such individuals may invest subject to the conditions that,
The person has retired on superannuation or otherwise on the date of making the investment; also the investment is made within one month of the date of receipt of retirement benefits.

A certificate from the employer, indicating the fact of retirement, retirement benefits, along with period of such employment with the employer, is attached with the application form.

The maximum amount invested can either be the benefits received on retirement or Rs 1,500,000 whichever is lower.

NRIs (Non-Resident Indians) and HUF (Hindu Undivided Families) are not permitted to invest in the scheme.

Investment Limits
Investments can be made in any post office by opening an account. Only one deposit can be made in each account; the deposit amount shall be a multiple of Rs 1,000 and should not exceed Rs 1,500,000.
A depositor can operate more than one account subject to the condition that all the deposits taken together don't exceed the specified amount i.e. Rs 1,500,000. Also more than one account shall not be opened in the same post-office during a calendar month.

Interest rate
The scheme will offer an interest of 9% per annum. The same will be payable on 31st March, 30th June, 30th September and 31st December each year.

Mode of holding
The depositor can hold an account either individually or jointly with his/her spouse.

Nomination
Nomination facility has been provided under the scheme. In the event of death of the depositor, the amount due shall be paid to the nominee. Nomination facility is also available incase of joint accounts.

Maturity
The scheme has a tenure of 5 years. The account can be extended for a 3 year period by making an application.

Withdrawals
Investors will be permitted to prematurely liquidate their investments at any time after the expiry of 1 year from the date of opening of the account subject to the following conditions,
In case the account is closed after the expiry of 1 year but before the expiry of 2 years from the date of opening of the account, an amount equal to 1.5% of the deposit shall be deducted.

In case the account is closed on or after the expiry of 2 years from the date of opening of the account, an amount equal to 1% of the deposit shall be deducted.

Tax benefits
The interest income from the scheme is fully taxable and subject to TDS (tax deduction at source) as well.
Investors whose tax liability on the estimated income for the financial year is nil, can avoid TDS by furnishing a declaration in Form 15-H or Form 15-G as applicable.

Transfer of Account
The account can be transferred from one post office to another. If the deposit amount exceeds Rs 100,000, a transfer fee of Rs 5 per Rs 100,000 deposited is charged.

Kisan Vikas Patra

2007-11-25T07:40:00.001-08:00

Kisan Vikas Patra

Who can apply
Any adult individual can purchase Kisan Vikas Patra (KVP) in his or her name (single holder type) or jointly with another adult individual with the condition 'jointly or survivor' (A type) or 'either or survivor' (B type). Besides, parents and guardians can also purchase on behalf of a minor. NRIs are not permitted to invest in KVP.

Where to apply
Application for the certificate can be made to all departmental post offices authorised to transact saving bank business.

How to apply
The application can be made in the prescribed form along with the payment that has to be deposited with the post office directly or through its authorised agents.

Investment Limits
There is no investment limit in this scheme and individuals can invest any amount they wish. Minimum investment required is Rs 100.

Denomination
Investments can be made in the denominations of Rs 100, Rs 500, Rs1,000, Rs 5,000, Rs 10,000, from any of the post offices and in denomination Rs 50,000 from all head post offices.

Interest rate
This scheme doubles the investor's money in 8 years 7 months with an option of premature encashment.

Maturity
The scheme matures in 8 years 7 months. For example if an individual buys the certificate by investing Rs 1,000 his money will become Rs 2,000 on maturity.

Tax benefit
Investments in KVP do not offer any tax benefits to the investors.

Loans
Kisan Vikas Patra has been declared as "Public Security" by the Government of Maharashtra. Certificate holders can avail loan from banks against the certificates.

Post Office Monthly Income Scheme

2007-11-25T07:39:00.002-08:00

Post Office Monthly Income Scheme

Who can open an account
Only resident Indians can open accounts under the scheme. Even more than one account can be opened provided total deposits in all the accounts do not exceed Rs 450,000 in a single account and Rs 900,000 in joint account. There can be only one deposit in the account, which should be a minimum of Rs 1,500 or multiple thereof.

Nomination
There is a facility of nomination

Maturity
The maturity period for deposits under the scheme is 6 years.

Interest
Deposits earn an interest of 8% and payment is made every month in cash or deposited in the post office savings account, at the option of depositors.

Tax benefit
Investments in Post Office Monthly Income Scheme are not eligible for any tax benefits.

Wealth Tax
The deposits are exempt from Wealth Tax.

Withdrawals
Permitted after one year, however 5% of the initial amount invested is deducted. Withdrawal after 3 years is permitted without any deduction. In case of death of a depositor before maturity, the account may be closed and the deposited amount is refunded to the nominee/heir along with interest upto the month preceding the month in which refund is made.

Transfer of Account
Account can be transferred from one post office to another.

Public Provident Fund

2007-11-25T07:39:00.001-08:00

Public Provident Fund

Who can subscribe
Any individual in his own name or on behalf of a minor, for whom he/she is a guardian can subscribe to a Public Provident Fund (PPF) account. Each individual can hold only one PPF account. NRIs are not permitted to open PPF accounts.

Where to apply
A PPF account can be opened at any branch of State Bank of India and its subsidiaries or at the head offices or sub post offices or sub post offices in section grade or at branches of the nationalised banks engaged in the collection of direct taxes.

Subscription
PPF is a 15 year scheme, requiring minimum 16 contributions in all. The amount of annual subscription ranges from Rs 500 to Rs 70,000 payable either in lump sum or convenient installments, not exceeding 12 in a year. The installment should be in multiples of Rs 5.

Excess deposits
Any amount deposited in excess of Rs 70,000 in a year, will not be treated as 'subscription' and shall be returned without any interest.

Interest
Deposits in the account earn an interest of 8% per annum compounded annually. Interest is payable on the lowest balance between the fifth day and the last day of the calendar month.

Nomination
One or more persons can be nominated.

Maturity
The normal maturity period is 15 years from the close of the financial year in which the initial subscription was made. An account, on the expiry of fifteen years, may be extended for a period of five years at a time.

Loan
Depositors can take a loan in the third financial year from the financial year in which the account was opened. Loan can be taken up to 25% of the amount standing at the end of second preceding financial year, repayable in 36 installments having the interest rate 1% higher than he receives.
Second, the loan will be given only after the repayment of the first loan. No loan can be obtained after the end of 5th year following the expiry of the year in which the initial subscription was made. In case of death of the subscriber, the nominee/legal heir is liable to pay interest on loans availed of by the subscriber but not paid before his death.

Withdrawals
A subscriber is permitted to make one withdrawal every year from the 7th financial year. An amount not exceeding 50% of the balance to his credit at the end of 4th year immediately preceding the year of withdrawal or at the end of preceding year, which ever is lower. The withdrawal can be made even every year.
Example:
Years Balance (Rs)
31.3.2000 200,000
31.3.1999 150,000
31.3.1998 120,000
31.3.1997 100,000

In the above case, the subscriber can withdraw Rs 50,000 in the year 2000-01.

In event of death of the subscriber
The amount standing to subscriber's credit will be repaid on demand to his legal heirs or the nominee. However the un-drawn balance will continue to earn interest till the end of the month, preceding the month in which the amount is paid to the nominee/legal heir.

In case of no nomination
The scheme now permits payment of balance up to Rs 100,000 to the legal heirs on the basis of affidavits. Earlier the heirs had to produce a succession certificate to get back the balance to the credit of the deceased.

Default
Where no amount is deposited in PPF account in any year the same should be got regularised by depositing at least Rs 500 per year along with a penalty of Rs 100 per year

Continuity after maturity
At the subscriber's option, the scheme may be continued for another 5 years after maturity. This facility can be availed for further period of 5 years on the expiry of 20th years and yet another 5 years on the expiry of 25 years and so on. The option should be exercised within 1 year after expiry of 15 years or the extended block period by applying in Form H.
Subscribers who continue their account after 15 years, with fresh subscription, can make one withdrawal per year subject to the condition that the total of the withdrawals during a block period shall not exceed 60 percent of the balance to their credit at the commencement of the extended period.

Tax benefit
The amount deposited and interest earned on it (including interest during the extension period) is completely exempted from income tax under Section 10(11) and the entire deposit in the account is exempted from wealth tax.
The annual contribution upto Rs 70,000 is eligible for tax deduction under Section 80C. Tax deductions can also be claimed on contributions made during the extended period provided the option to continue is exercised within one year of expiry of 15 years (or the extended block period).

Protection from attachment
PPF cannot be attached under any order or decree of court.

Post Office Time Deposit Account

2007-11-25T07:38:00.000-08:00

Post Office Time Deposit Account

Who can invest
Individuals are permitted to invest in Post Office Time Deposits. Any person can open an account, whether singly or jointly with another person. An account can be opened on behalf of a minor or person of unsound mind. Even more than one account can be opened without any limit. NRIs are not permitted to invest in Post Office Time Deposits.

Deposits
Deposits can be made in multiples of Rs 50. There is no upper limit on the investments.

Maturity
The investment can be made for 1 year, 2 years, 3 years or 5 years.

Interest
Interest on time deposits is payable as under:
Interest rate table Time (Yrs) Interest (%)
1 6.25
2 6.50
3 7.25
5 7.50

Withdrawal
Withdrawals are not permitted before 6 months. No interest is payable if deposit is withdrawn after 6 months but before 1 year. If deposits made for 2 years, 3 years, or 5 years are prematurely withdrawn after one year, the interest will be paid at a rate 2% less than the rate applicable to the period for which the deposit has run.
For example, where the completed years and months in the case of deposit in a 5 year deposit exceeds 3 years, interest shall be calculated at the rate which shall be 2% less than the rate specified for a deposit of 3 years.

Tax benefit
Investments in Post Office Time Deposits are not eligible for any tax benefits.

National Savings Certificate (VIII Issue)

2007-11-25T07:36:00.000-08:00

National Savings Certificate (VIII Issue)

Who can apply
Any adult individual can purchase National Savings Certificate (NSC) in his or her name (single holder type) or jointly with another adult individual with the condition 'jointly or survivor' (A type) or either or survivor' (B type). Besides, parents and guardians can also purchase on behalf of a minor. NRIs cannot invest in NSC (VIII Issue) since there is no such provision in the rule.

Where to apply
Application for the certificate can be made to all post offices authorised to transact saving bank business.

How to apply
The application can be made in the prescribed form along with the payment, that has to be deposited with the post office directly or through its authorised agents.

Payment
The payment is to be made in cash/cheque, pay order/demand draft or by presenting a withdrawal form along with the pass book of a post office saving bank account or by surrender of matured old certificates (including National Development Bank Bonds, Social Security Certificate, Kisan Vikas Patra).

Nomination
The facility of nomination is available on all certificates (including the joint holder type), except for the certificate purchased by on behalf of a minor.

Interest rate
The rate of interest is 8% per annum compounded half yearly, payable on maturity.

Maturity period
A certificate shall mature after 6 years from the date of certificate.

Investment Limit
Any individual can subscribe to the scheme with a minimum investment of Rs 100. There is no restriction on investment in this scheme on the upper side. However, investment up to Rs 100,000 qualifies for tax deduction. Certificates are available in denominations of Rs 100, Rs 500, Rs 1,000, Rs 5,000 and Rs 10,000.

Encashment
The certificates are encashable on maturity at the post office in India after the officer in-charge verifies the entitlement of the person presenting the certificate for encashment.

Premature encashment
Premature encashment of certificate (any time before 6 years) is allowed under specific circumstances only, such as death of the holder(s), forfeiture by the pledgee or under court's order. No interest is payable on encashment within one year. After one year and before three years, simple interest rate is payable at the post office savings bank's rate of 4.5% for the completed months only.
The amount payable for a certificate of Rs 100 denomination, on encashment after three years is shown below in the table.

Completed Period (Yrs) 3.0 3.5 4.0 4.5 5.0 5.5
Amount payable (Rs) 121.15 125.09 129.16 133.36 137.69 142.16

Tax Benefit
Deposits made in this scheme qualify for tax deduction under Section 80C of Income Tax Act subject to an upper limit of Rs 100,000.

FAQs on Taxation - Charity

2007-11-25T07:34:00.000-08:00

Can individuals claim tax benefits for donations to charities? Are all donations made eligible for tax benefits?

Yes, individuals can claim tax benefits on eligible donations to charities. Deductions are available under Section 80G to any taxpayer i.e. individual - resident and non-resident, firm, HUF, company.

But, all donations are not eligible for deductions. Tax deductions can be claimed only on specific donations i.e. those made to prescribed funds and institutions.

What are the benefits available for deductions, in terms of percentage of the amount donated?

The tax benefits on donations are available under Section 80G of the Income Tax Act and have been segregated as follows:

Those eligible for 100% deduction on the donation amount,

Those eligible for 50% deduction on the donation amount,

Those eligible for 100% or 50% deduction on the donation amount, subject to maximum of the 10% of the gross total income.

Is there an upper limit on the amount for purpose of claiming tax benefits?

No, there is no upper limit on the amount of donation. However in some cases there is a cap on the eligible amount i.e. a maximum of 10% of the gross total income.

The limit is to be applied to the adjusted gross total income. The 'adjusted gross total income' for this purpose is the gross total income (i.e. the sub total of income under various heads) reduced by the following:

Amount deductible under Sections 80CCC to 80U (but not Section 80Gl)

Exempt income

Long-term capital gains

Income referred to in Sections 115A, 115AB, 115AC, 115AD and 115D, relating to non-residents and foreign companies.

Should any documents be maintained by the donors for the purpose of claiming tax benefits?

Yes, the donor is required to maintain a proper receipt as evidence of the payment of donation.

Can an individual claim benefits for donations made, if he doesn't hold the necessary documentary evidence?

In order to claim the benefit for donations made, it is necessary to furnish, along with the return of income, the proof of payment made towards the donation to the eligible institution or fund. Tax benefits cannot be claimed without aforementioned documents.

Can NRIs claim tax benefits for donations made to charities?

Yes, NRIs are also entitled to claim tax benefits against donations, subject to the donations being made to eligible institutions and funds.

FAQs on Taxation - Gold

2007-11-25T07:33:00.000-08:00

Are there any tax implications for investing in gold?

No, investing in gold doesn't entail any tax implications.

What is the long-term or short-term capital gains liability, arising at the time of sale?

Ornaments made of silver, gold, platinum or any other precious metal and precious or semi-precious stones, whether or not set in any furniture, utensil or other article or worked or sewn into any wearing apparel are treated as capital assets. Hence, a long-term or short-term capital gains liability will arise at the time of sale.

Gold or jewellery when held for the period more than 36 months is treated as long-term capital asset. If they are held for period of less than 36 months, then they are treated as short-term capital assets.

While calculating capital gains, the assessee is entitled to claim as deduction the cost of acquisition from the sale value. In the case of long-term capital gains, the indexed cost of acquisition is allowed as deduction.

In case of a capital loss, for what duration can the same be carried forward by investors?

A capital loss (short-term/long-term) can be carried forward for a maximum period of 8 years from the assessment year in which the loss was first incurred.

A short-term capital loss can be set off against any capital gain (long-term and short-term); however a long-term capital loss can be set off only against a long-term capital gain.

How can investors optimise their capital gains tax liability?

Tax liability arising from long-term capital gains, on the sale of gold or other jewellery can be optimised by investing in a residential house under Section 54 or any other specified assets like capital gains bonds.

Short-term capital gains can be adjusted against short-term capital losses.

What are the Gift Tax implications pertaining to gold?

Gold doesn't fall under the purview of Gift Tax; hence there are no tax implications.

Are investments in gold subject to tax implications under Wealth Tax?

Yes, gold falls under the purview of the Wealth Tax Act. The tax is levied on jewellery, bullion, furniture, utensils or any other article made wholly or partly of gold, silver or platinum.

What are the tax implications of investing in gold bonds issued by SBI?

Under the SBI Gold Deposit Scheme, the following are eligible to make investments, individuals - either singly or two individuals on a 'first holder or survivor' basis, Hindu Undivided Family (HUF), trusts and companies.

The tax benefits of investment in the Gold Deposit Scheme are:

No Income Tax implications on the interest income

No Wealth Tax implications on the gold deposited

No capital gains liability

FAQs on Taxation - Fixed Deposits & Bonds

2007-11-25T07:31:00.000-08:00

What are the tax implications of investing in fixed deposits and bonds like 8% Savings (Taxable) Bonds, 2003?

Interest income on fixed deposits and bonds, such as 8% Savings (Taxable) Bonds, 2003, is taxable under the head "Income from other sources". The entire income received is taxable. However, an assessee can claim direct expenses incurred to earn that income under the provisions of Section 57(iii).

Can investors claim any tax benefits for investments made in fixed deposits/bonds under Section 80C? Similarly, are any benefits available to investors on the interest income?

Investments in fixed deposits with a scheduled bank for a fixed period of not less than 5 years are eligible for deduction under Section 80C. Infrastructure bonds also qualify as eligible investment avenues under Section 80C. Section 10(15) states the list of various securities and bonds on which interest is exempt from tax.

Are senior citizens eligible for any additional tax benefits on investments in fixed deposits/bonds?

No, the Income Tax Act provides for the same benefits to all individuals. However certain fixed deposit schemes and bonds may provide higher interest rates for investments made by senior citizens.

Are investments made in these instruments subject to tax deducted at source (TDS)? What is the limit below which TDS is not applicable?

Yes, if the interest from such investments exceeds Rs 2,500 in a financial year then TDS is applicable. The TDS limit is raised to Rs 10,000 in case of interest payment on fixed deposits by a bank or by a company carrying on the business of long-term finance for construction or purchase of houses in India, for residential purposes as approved by the Central Government.

Can investors avoid TDS; if yes what documents are required to be provided for the same?

Investors can avoid TDS by presenting Form 15G, which states that the person does not have a taxable income.

If the bank deducts tax at source, how should an investor claim the benefit?

The assessee has to file a return of income every year declaring his total income and the tax payable thereon. He can furnish the TDS certificate with the return filed and the tax payable would reduce accordingly. If additional tax has been paid, then the excess amount will be refunded to him by tax authorities.

What are capital gains savings bonds & what benefits do they offer?

Investments in capital gains savings bonds enable investors to avoid paying the capital gains tax. These bonds are issued by REC and NHAI. For example, when a property is sold and a long-term capital gains tax liability arises, the assessee has an option to avoid it by investing the capital gains in another property within the specified time duration. Another option available to him (to avoid paying tax) is to invest the requisite sum in capital gains bonds within a period of 6 months from date of transfer.

Investors should ensure that these bonds are not transferred or converted within a period of 3 years from the date of acquisition; also no loan, mortgage or encumbrances should be created on these bonds. In such an event, investors will lose the tax benefits and capital gains will become taxable.

FAQs on Taxation - Life Insurance

2007-11-25T07:29:00.000-08:00

What are the tax benefits available to an individual in respect of premium paid on life insurance policies?

Rebate under Section 88 is available in respect of life insurance premium only up to Assessment Year 2005-06. From the Assessment Year 2006-07, life insurance premium paid by an individual qualifies for a deduction under Section 80C of Income Tax Act, 1961. An individual can claim deduction on premium paid for a maximum of Rs 100,000 in each financial year. Deduction under Section 80C is a deduction from gross total income. Amount deductible under Section 80C is equal to

100% of the "qualifying investment", which includes life insurance premium, or

Rs 100,000, whichever is lower.

What are the tax benefits available under pension plans?

The tax benefits for premium paid per annum in case of pension plans are eligible for a maximum benefit of Rs 100,000 under Section 80CCC. The said Section 80CCC limit also falls under the overall Section 80C limit of Rs 100,000. In other words, the deduction aggregate, under Section 80C, 80CCC and 80CCD cannot exceed Rs 100,000

Are maturity proceeds on life insurance and pension policies taxable?

The maturity proceeds of life insurance policies are not taxable. However, under pension plans, upto one-third of the maturity amount can be withdrawn in cash and the same is treated as tax-free. An annuity has to be purchased with the remaining two-third amount. Pension receipts from the same will be treated as income in the hands of the assessee and taxed accordingly.

Can tax benefits be claimed if the premium is paid by an individual on his/her spouse's policy?

Tax rebate under Section 88 can be claimed if the premium is paid by an individual on his/her spouse's policy but up to Assessment Year 2005-06. From the Assessment Year 2006-07 life insurance premium paid by an individual on his/her spouse's policy qualifies for a deduction under Section 80C of Income Tax Act, 1961.

If a person discontinues paying premium on his life insurance or a pension policy, does he get tax benefits?

If a person stops paying premium amounts on his/her life insurance policy, it amounts to discontinuation of the policy. Hence, he is not entitled to claim any tax benefits.

If a tax-payer discontinues the life insurance policy before premiums have been paid for a period of 2 years from the commencement of the policy, no tax deduction is allowed in respect of any premium paid on that policy in the year in which the policy is terminated.

Further, the amount of tax deduction, allowed for the premium paid in the preceding year, is also treated as the tax payable for the year in which the policy is terminated.

If a person, participating in a Unit Linked Insurance Plan (ULIP), terminates his policy, can he claim any tax benefits on the same?

If a person participates in a Unit Linked Insurance Plan (ULIP) and then terminates his participation, he will not be entitled to claim any tax benefits.

What are the deductions available in respect of a medical insurance premium?

The premium paid for medical insurance qualifies for rebate under Section 80D as follows-

Insurance premium paid or Rs 10,000 whichever is lower.

The aforesaid limit is Rs 15,000, where the individual or his spouse or dependant parents or any member of the family (for whom such premium is being paid) is a senior citizen (i.e. one who is resident in India and who is at least 65 yrs of age at any time during the previous year).

Who is not required to have a permanent account number?

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The provisions of Section 139 A shall not apply to the following class or classes of persons:

Persons who have agricultural income and are not in receipt of any other income, chargeable to income tax

NRIs

Central Government, State Government and Consular Officers, in transactions where they are the payers.

It is essential to quote your PAN number on:

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Returns to, and/or correspondence with any Income Tax Authority

Challans for payment of direct taxes

Application for installation of a telephone connection (including a cellular telephone)

Application for opening a bank account.

Documents pertaining to sale or purchase of a motor vehicle (other than two wheelers)

Documents pertaining to sale or purchase of immovable property valued at Rs 500,000 or more

Documents pertaining to a time deposit/fixed deposits exceeding Rs 50,000 with a bank

Documents pertaining to deposits exceeding Rs 50,000 in any account with a Post-Office Savings Bank

Documents pertaining to a contract of a value exceeding Rs 1 million (Rs 10 lakhs) for sale or purchase of securities (shares, debentures)

Payment to hotels and restaurants against their bills for an amount exceeding Rs. 25,000 at any one time

Who has to apply for a permanent account number? Is it mandatory to obtain a permanent account number?

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The following persons should apply for allotment of permanent account number in Form No 49A:

Every person, if his total income, assessable during the previous year, exceeds the maximum amount which is not chargeable to tax or any person, carrying on business or profession, whose total sales, turnover or gross receipts, are or is likely to exceed Rs 500,000 in any previous year and who has not been allotted any permanent account number is obliged to obtain permanent account number.

A person who is required to furnish return of income under Section (4A) of Section 139 ( i.e. charitable trust) is also required to obtain permanent account number before the end of the accounting year.

The Central Government may specify (by notification in the official gazette) any class or classes of persons by whom tax is payable under the Income Tax Act or any tax or duty is payable under any other law for the time being in force, including importers and exporters to apply to the assessing officer for the allotment of a permanent account number.

What is a permanent account number?

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The permanent account number is allotted by the assessing officer to any person for the purpose of identification.

What is a defective return?

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For the purposes of Section 139 (9), a return of income is regarded as defective, unless all the above conditions, mentioned for details required to be filled in, are fulfilled.

Is any permission required before filing a revised return?

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There is no provision in the Income- Tax Act to seek permission to revise a return. It is the right of the assessee to submit such return. However, an application seeking permission to revise a return , as originally filed, cannot be treated as revised return.

Can a second revised return be filed?

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A second revised return can be filed under Section 139(5), correcting omissions or wrong statements made in the first revised return, for the first revised return, filed under Section 139(5) would, in law, be a return under Section 139 (1) as well.