Friday, May 22, 2009

Tax Exemption Limit may go up in UPA's second innings

The full budget to be presented by the new government in the forthcoming session of Parliament to begin sometime next month may come packed with some concessions for the middle class by way of raising the tax exemption limit to up to Rs 1.75-Rs 2 lakh from the current Rs 1.50 lakh. 


The other benefit in the direct tax segments could be withdrawal of the Fringe Benefit Tax. If through, both these measures will result in a tax outgo of around Rs 10,000 crore. Proposals in this regard are under active consideration, indicated a senior official in the finance ministry. 


Raising of the tax exemption limit along with the withdrawal of FBT will act as another stimulus since the large middle class population will be left with more money in hand, especially at a time when the government is likely to release the remaining 60% salary arrears of the 6th Pay Commission.

 

The removal of FBT has also been mooted by the commerce ministry. It had also sought continuation of interest rate subsidy while seeking to further raise it from the existing 2% to 4%. 


Sources in the finance ministry said there is no scope for any further cuts in excise duty, customs or service tax as the indirect tax collections had slipped into negative domain towards the end of the last fiscal. With the widening fiscal gap, it is equally important for the government to keep its revenue stream rejuvenated to fund its developmental and social schemes. 


The commerce ministry is firmly backing industry's proposals for extending tax sops to export-oriented units, besides the continuation of interest rate subvention till March 2010. In their proposals to the finance ministry, industry chambers had asked the government to include measures in the budget that would promote investment and create additional demand.

 नई सरकार बढ़ाएगी टैक्स एग्ज़म्पशन लिमिट

अगले संसदीय सत्र में नई सरकार कारोबारी साल 2009-10 का बजट पेश करेगी। और, ये बजट मिडिल-क्लास को खुश कर सकता है। खबर है कि यूपीए सरकार 1.50 लाख रुपए की मौजूदा टैक्स एग्ज़म्पशन लिमिट को बढ़ाकर 1.75 लाख-2.0 लाख रुपए कर सकती है। 


खत्म होगा फ्रिंज बेनिफिट टैक्स(FBT)
इतना ही नहीं, प्रत्यक्ष कर (डायरेक्ट टैक्स) सेगमेंट में और भी कई बदलाव की गुंजाइश है। मसलन, फ्रिंज बेनिफिट टैक्स को खत्म किया जा सकता है। और अगर सरकार एग्ज़म्पशन लिमिट बढ़ाने और एफबीटी को खत्म करने का फैसला लेती है तो सरकारी खजाने को 10,000 करोड़ रुपये का चूना लगेगा। फाइनेंस मिनिस्ट्री के एक वरिष्ठ अधिकारी ने जानकारी दी कि इन दोनों ही मुद्दों पर विचार किया जा रहा है।

मिडिल-क्लास को एक और स्टिमुलस
टैक्स एग्ज़म्पशन लिमिट को बढ़ाने और एफबीटी को खत्म करने का फैसला मिडिल क्लास के लिए एक और स्टिमुलस का काम करेगा क्योंकि जनता के हाथ में ज़्यादा पैसा रहेगा। वो भी तब जब सरकार पहले ही 6ठें पे कमीशन के 60% एरिअर्स भी रिलीज़ करने वाली है। कॉमर्स मिनिस्ट्री भी एफबीटी हटाने के पक्ष में है। इसके अलावा, मिनिस्ट्री इंटरेस्ट रेट सब्सिडी को बनाए रखने के पक्ष में है और उसे 2 परसेंट से बढ़ाकर 4 परसेंट करना चाहती है। 

एक्साइज ड्यूटी-सर्विस टैक्स दर नहीं घटेगी
फायनेंस मिनिस्ट्री के सूत्रों का कहना है कि एक्साइज़ ड्यूटी, कस्टम ड्यूटी और सर्विस टैक्स में अब किसी तरह की कटौती की गंजाइश नहीं रह गई है क्योंकि पहले ही अप्रत्यक्ष कर का कलेक्शन पिछले कारोबारी साल में नेगेटिव हो गया था। सरकार के लिए ये जरूरी है कि वो विकास और सामाजिक कार्यक्रमों के के लिए रेवेन्यू का बंदोबस्त रखे, ऐसे में अप्रत्यक्ष कर दरों में बदलाव अब उचित नहीं।

उधर, इंडस्ट्री चैंबंर्स एक्सपोर्ट-ओरिएंटेड यूनिट्स के लिए टैक्स-सॉप्स की मांग कर रहा है। और कॉमर्स मिनिस्ट्री इस मांग का सपोर्ट कर रही है। फायनेंस मिनिस्ट्री को दिए अपने प्रस्ताव में कॉमर्स मिनिस्ट्री ने सरकार से मांग की है कि वो बजट में ऐसे उपायों को जगह दे जिससे निवेश को प्रोत्साहन मिले और साथ ही मांग भी बढ़े।

Saturday, May 16, 2009

Saving Income Tax through Smart Tax Planning – Guide to Section 80C Deductions

Are you looking to save some tax? Your first port of call should be Section 80C of the Income Tax Act. Section 80C provides for deduction from Gross Total Income for certain eligible investments and payments. Key points to note:

  • Applicable only for Individuals and Hindu Undivided Family (HUF).
  • Actual payment should have been made to claim Section 80C deduction. Additionally the payment should be made from taxable income of the year in which deduction is being claimed.
  • Maximum deduction under Section 80C is Rs 100,000. Deduction can be claimed for any of the payment or investment. There is no sub-limit for any of the available options.
  • Section 80C replaces the erstwhile Section 88 with more or less the same investment mix available in Section 88 but with a major change in the method of providing a tax benefit. While Section 88 provided for Rebate on Income Tax payable, Section 80C provides for deduction from the Gross Total Income.

Eligible Investment / Payment under Section 80C

Employee Provident Fund (EPF): Salaried individuals are compulsorily required to contribute minimum 12% of the Basic Salary to EPF. This amount is deducted from monthly payroll. Employer is also required to make a matching contribution towards Employees retirement kitty. Employer has to contribute 8.33% of Basic Salary towards Employee Pension Scheme (EPS) and balance 3.67% towards EPF (for the purpose of Employer contribution to EPS, basic Salary is restricted to maximum Rs 6500 per month, i.e. maximum contribution to EPS is Rs 541 per month and balance of Employer’s 12% contribution will go into EPF). For the purpose of Section 80C deduction, Employee's own contribution towards EPF is eligible. Note Employer’s Contribution to EPF is not eligible for Section 80C deduction.

Voluntary Provident Fund: Employee is free to voluntarily make contribution to EPF over and above 12% of Salary as required by law. This voluntary contribution by an individual towards EPF is also eligible for Section 80C deduction.

Public Provident Fund (PPF):

  1. Contribution made by an individual to PPF account is eligible for Section 80C deduction. Contribution to PPF account of spouse and children also eligible.
  2. HUF can contribute to PPF account of any member of the HUF.
  3. PPF account can be opened with Post office and select branches of State Bank of India, other PSU banks and even some Private banks.
  4. Minimum deposit is Rs. 500 and Maximum is Rs. 70,000 in a financial year (1st April to 31st March). One deposit with a minimum amount of Rs.500 is mandatory each financial year.
  5. Lock-in for 15 years. Partial withdrawal after 7 years allowed.

Pension Funds: Contribution towards Pension Funds is EPF is eligible for Section 80C deduction. Note Section 80CCC which restricted Pension Fund contribution to Rs. 10,000 is not applicable with effect from 1st April 2006.

Superannuation fund: Contribution to approved superannuation fund is eligible for Section 80C deduction.

Deferred Annuity:

  1. Payment in respect to non-commutable deferred annuity plan taken in the name of self, spouse or child is eligible for Section 80C deduction.
  2. Deferred annuity deducted from Government employee, subject to maximum of 20% of salary is also eligible.

Life Insurance Premium:

  1. Life insurance premium paid for yourself, your spouse or your children.
  2. HUF can claim Section 80C deduction in respect of premium paid for insuring life of any member thereof.
  3. Life insurance premium paid by an individual towards insuring life of his parents (father / mother) or in-laws or brother / sister is not eligible.
  4. If there is more than one policy, aggregate amount of premium paid will be eligible for deduction. Also it is not compulsory to have the insurance policy from Life Insurance Corporation (LIC), even insurance bought from private players is allowed.
  5. If policy is surrendered within 2 years of commencement, no deduction in respect of the Insurance premium paid is allowed. Moreover the aggregate amount of the deductions allowed in respect of such policy in the preceding years is added to the income.

Unit Linked Insurance Policy (ULIP):

  1. Premium paid for ULIP is eligible.
  2. Maximum premium eligible is restricted to 20% of sum assured.
  3. If policy is surrendered within 5 years of commencement, no deduction in respect of the premium paid is allowed. Moreover the aggregate amount of the deductions allowed in respect of such policy in the preceding years is added to the income of the year in which policy is surrendered.

Equity Linked Savings Scheme (ELSS):

  1. Contribution to Mutual Fund schemes notified under Section 10(23D) of the Income Tax Act (normally referred to as ELSS Mutual Fund Schemes or Tax Saving Mutual Fund Schemes) is eligible.
  2. Investment in ELSS has a lock-in period of 3 years. Pre-mature withdrawals is not allowed under any circumstance.

Home Loan Principal Repayment: The principal component of the Equated Monthly Installment (EMI) is eligible for Section 80C deductions. Follow the link to download an Excel based model to calculate Principal and Interest component of the EMI, i.e. EMI Amortization Schedule. Also note, if the Home is sold within 5 years from the end of the financial year in which possession of such property is obtained, no deduction in respect of the principal repayment is allowed. Moreover the aggregate amount of the deductions allowed in respect of principal repayments in the preceding years is added to the income of the year in which the Home is sold.

Other Home Related payments:

  1. Stamp duty, registration fee and other expenses for the purpose of transfer eligible.
  2. Admission fee, cost of share and initial deposit not eligible.
  3. Cost of any addition or repair after issue of completion certificate or after the house property has been occupied or been let out is not eligible.

National Savings Certificate (NSC): The amount invested in National Savings Certificate (NSC) can be included in Section 80C deduction.

Infrastructure Bonds: Investment in bonds issued by specified Infrastructure companies is also eligible for Section 80C deductions. Note in the erstwhile Section 88, Rs. 30,000 was required to be invested exclusively in Infrastructure bonds. This provision is not applicable anymore and investment in Infrastructure bonds is just one of the various options available for the purpose of Section 80C deduction.

Bank Term Deposits: Term Deposit with scheduled bank for minimum tenor of 5 years.

Term deposit with Post Office: Minimum tenor 5 years.

NABARD Bonds: Investment in notified bonds issued by National Bank for Agriculture and Rural Development (NABARD) is also eligible for Section 80C deduction.

Senior Citizens Savings Scheme: Deposits in an account under the Senior Citizens Savings Scheme Rules is also eligible for Section 80C deduction.

Tuition fees:

  1. Deduction available only to Individual assesses and not HUF.
  2. Tuition fees paid for the purpose of full-time education of your children (maximum two children).
  3. Tuition fees for Self or Spouse not eligible.
  4. Tuition fees must be paid to any university, college, school or other educational institution situated within India.
  5. Development fees or donation not eligible.

Conclusion

As can be seen from above, there is considerable amount of flexibility an individual / HUF has in terms of deciding where to invest in order to claim Section 80C deduction. While where to invest would essentially vary across people depending on their financial goals, risk appetite, etc, as a general rule one can look at the following investment options in terms of preference:

  1. EPF: For Salaried individuals EPF investment happens automatically and compulsorily.
  2. Home Loan Principal Repayment: If you have taken Home Loan and are paying EMI, principal component of the EMI is automatically eligible.
  3. Life Insurance: Every individual should have adequate amount of Life Insurance coverage. Term Policy which is pure risk cover is recommended as the premium payable for required insurance amount is less and more importantly it helps in segregating insurance from investment.
  4. ELSS / PPF: Whatever balance amount is left can be invested in ELSS or PPF depending on the risk appetite of the individual. While PPF would provide stable and assured returns, ELSS is expected to provide higher return over a longer investment horizon. In case of non-salaried individuals since there is no EPF investment, some allocation to PPF is highly recommended. For relatively younger individuals (I don’t know how to define this term, but let’s say individual below the age of 45 years) greater allocation to ELSS is advisable since equity as an asset class has traditionally provided highest return over a long investment horizon. Even within ELSS, it would be strongly recommended to go for Systematic Investment Plan (SIP), as it would help in spreading the investment over a period of time. Follow the link to download an Excel based model to calculate the value of Mutual Fund SIP Investment over a period of time, i.e. Mutual Fund SIP Calculator.

To conclude, while there is no “one size fits all” solution, key is for an individual to match his financial goals with the varied investment options available for claiming the Rs 100,000 deduction under Section 80C.

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