Ease your tax burden

While insurance companies are launching a spate of new products and will keep doing so till March,a tax payer should decide for himself about the product that suits him the best. Analyse your total income,adding up the salary income,business income,capital gains,house property and other sources. Some of your expenses,for example, mediclaim premium payments (under Section 80D) and home loan interest payments (up to R1.5 lakh) will reduce your taxable income. However,remember that they are not investments. If you have a mediclaim,pay your premiums by cheque to avail the tax benefit.

Under Section 80 C,one can invest up to R1.20 lakh (R1 lakh under Section 80 C and R20,000 investment in infrastructure bonds under Section 80CCD). Investments made in Public Provident Fund (PPF),life insurance premiums,national savings certificate of post offices,employee’s contribution to provident fund,tax-saving mutual funds,five-year fixed deposits in banks or post office and pension plans qualify for tax deduction. Out of this,pension funds and PPF have sub-limits of R10,000 and R1,00,000,respectively,which means investments in these two categories over the prescribed limit will not fetch any tax benefits. Experts say buying an insurance product is the most common investment a tax payer does to get tax deductions. One gets income-tax deduction on the premium paid under Section 80 C of the Income Tax Act,1961. The maximum deduction available under this section is R1 lakh. The deduction on the premium paid can be availed for self,spouse or any child. In case of an Hindu Undivided Family (HUF),the deduction is available in respect of the premium paid for any member. But one should be careful that the deduction is reversed,if the policy is terminated or ceases to be in force within two years after the date of commencement of policy.

Even the maturity amount or any bonus received is exempt from tax under Section 10(10D) of the IT Act. Also,the claim proceeds received from the insurance company by the dependent or the nominees of the policy holder after his death are not taxable under the Act. But a policy holder should keep in mind that any sum received under a Keyman insurance policy is taxable and any money received under an insurance policy issued on or after April 1,2003,in respect of which the premium payable for any of the years during the term of the policy exceeds 20% of the sum assured is taxable unless received on the death of the person.

For risk-averse investors,bank fixed deposits is better option for investment and tax savings under Section 80C. However,time deposits less than five years —either in banks or at post offices —will not qualify for tax savings. With 9%-plus interest rates on fixed deposits for a five-year tenure,experts say it makes sense to park money for long term and get tax deduction on the principal. However,the interest earned is taxable according to the tax payer’s slab.

Even tuition fees paid for two children will be deducted from your income under Section 80 C and the deduction will be on the actual payment of the fee and not on books,bus fare,private tuition,development fees,etc. Moreover,an individual who has taken a home loan can avail of deduction towards repayment of principal in the financial year. This will be above the R1.5 lakh rebate which one gets on the interest amount paid for the housing loan under Section 24. Even the one-time amount paid as stamp duty for registration of the house is eligible for tax deductions under Section 80C.

For risk-averse investors,investing in infrastructure bond is another viable option. Currently,bonds of L&T Infra,IDFC Infrastructure and IFCI are open for subscription. The term of maturity is 10 years with a buyback after five years and one can opt for annual or cumulative interest payout. Infrastructure bonds give the investor the stability of fixed returns and the safety of the capital. An individual in the highest tax bracket of 30.90% can save an extra R6,180 by investing R20,000 in infrastructure bonds and those in the lowest tax slab of 10.30% can save R2,000 by investing the same amount of money. All the bonds will be listed on the Bombay Stock Exchange and the National Stock Exchange and can be traded after the lock-in period. Investors can mortgage or pledge these bonds to avail loans after the mandatory lock-in. The issuer of the bond will not deduct any TDS and the investor has to declare the income from these bonds and pay taxes on the interest income.

One can also opt to invest in the equity route to get deductions. Under Section 80C one can invest in equity-linked savings schemes (ELSS) of mutual funds. Any income in the form of dividends received from ELSS is tax-free. However,when Direct Taxes Code regime will be implemented,the tax benefit from ELSS investments will cease to exist.