Wednesday, September 8, 2010

The Eyes of the Beholder

So much beauty, so much joy,
So much that life has to give.
Every moment is abundance,
Can you trust enough to receive?
 
So much truth, so much wisdom,
In every flower and leaf of grass.
Laughter and celebration,
As you watch life moving past.
 
So much wonder, so much surprise,
If you open your eyes to it.
You insist on shutting it tight
And let the beauty pass you by.
 

Friday, September 3, 2010

Part 18: Saving on Tax


Part 18: Saving on Tax

Continuing our discussion on Tax, we shall now look at the ways to save on Taxes.  To the extent possible that is, which is not much.

We have already looked at some of the incomes that are not taxable like agricultural income and dividend income. We have also seen specific exemptions available against the Head “Income from Salaries”. Once you have considered all this and totaled up your income, there are certain other avenues for saving tax as well.

Let us first talk about the famous Section 80C.  Under this section you are allowed to deduct up to Rs. One Lakh from your total income.  The tax you will save of course depends on your marginal rate – if you are at the highest rate, you will save about 30% of this amount.  To get something you always have to give something – in case of 80C investments you agree to lock-in periods.

Some of the items allowed under this section, you may have already “spent” on or it may have been done for you.  Add up your contribution to PF for the year (remember the company contribution is not taxable in any case); add any contribution to Voluntary Provident Fund with your employer if you have opted for it; tuition fees for your children; and principal repayments on your home loan (the annual statement from your HFC shows the principal portion of the EMI that you repaid). Add the premium you pay on your life insurance policies or ULIPs (subject to it being less than 20% of the sum assured). If you have paid any amount on your own towards cost of purchase or construction of a residential property, add that too.

Now that you have done all that, if the sum exceeds One Lakh you can stop, since the limit for Section 80C investments has been reached. If you have some money left from the limit, you have some options.

You can look at investment in Equity Linked Savings Schemes (ELSS) with a lock-in period of three years.  This comes with a good potential upside but has market risk attached. Or you can invest in Public Provident Fund (PPF) that yields you 8% p.a. currently – this is highly safe since it carries the guarantee of the Government of India. The limit for investment in PPF is Rs.70,000 per year, irrespective of whether you claim tax deduction on it or not. You can spend on insurance (I shall not use the word invest here – insurance is not an investment) – you would be well advised to stick to pure term insurance plans – the premium is deductible under Section 80C. You can invest in five-year (locked-in) Fixed Deposits with a Bank.

That’s all there is to it! There are a couple of other options like National Savings Certificates (no real advantage here – you can skip this option) and Post Office Savings scheme (too much hassle – skip this too).

There is an additional Rs.20,000 you can invest (over and above the One Lakh limit) in Infrastructure Bonds under Section 80CCF. These bonds which will be issued by financial institutions will entail a lock-in period of five years after which they can be traded in the market. The interest will be taxable fully in the year of accrual.

Talking of interest, the interest you earn on PF or PPF is fully exempt from tax – other interest is not.

Over and above the tax deductions available under Section 80C you have some other sections that may apply in your case, or that you could take advantage of.

Under Section 80D, Medical insurance for self, spouse or children up to Rs.15,000 is allowed as a deduction – you get an additional Rs.15,000 for premium paid for insuring parents. Section 80E allows a deduction for interest paid on loan taken from a financial institution or bank for self, spouse, or children for the purpose of higher education for a maximum period of eight years without any limit on the amount. Donations made to an approved charitable institution are deductible under Section 80G either fully or for 50% of the amount, depending on the institution to which the donation has been made.

Section 80DDB allows a deduction of up to Rs.40,000 for actual expenditure incurred on medical treatment of self or dependent relative suffering from a terminal disease like cancer, AIDS, etc. Under Section 80U you can claim a deduction of Rs.50,000 if you are suffering from a permanent physical disability.

You can also avoid paying taxes on capital gains from sale of long-term capital assets in certain cases.

Long term Capital gains on sale of residential house is exempt if another house property is purchased with 3 years from the date of sale, or built within “one year before and two years after” the date of sale (Section 54).

Long term Capital gains on sale of asset other than residential house is exempt if a house property is purchased within 3 years from the date of sale, or built within one year before and two years after date of sale (Section 54F) In this case,  including the new house, you cannot be owning more than two houses.

In both the above cases, you need to hold on to the new house so purchased for at least three years, else you have to pay back the tax that you saved.

Long term Capital gains on sale of any asset is exempt if invested in certain bonds notified for this purpose (Section 54EC). These bonds are redeemable after three years and the investment in these in any one financial year cannot exceed Rs.50 lakhs.

In case you are approaching the time to file returns and have not been able to deploy your funds since your house is under construction, etc. you need to park your money in a Special Deposit with the Bank so as to avoid coughing up at the time of filing your returns.

If all this sounds confusing, it is.  CA’s need to make a living too – you should contact your CA for advice!

That concludes our three-part discussion on Tax. If it seemed a bit complex, let me clarify that I have barely scratched the surface of that vast area of knowledge, which seems to be specifically designed to make life difficult for all of us ordinary folks!

Bye till the next issue!