A salary structure suited to your interests and a little diligence in choosing the right kind of investments can ensure the maximum tax benefits.

By Shailesh Haribhakti & Mayur Shah

Every income-tax assessee is legitimately entitled to arrange his or her economic affairs in a manner that attracts the least tax. To enable such an exercise to succeed, it is imperative to consider the tax implications of various alternative arrangements and to create a basis for an individual's financial objectives to be met. This is what is intended in the following paras.

Ideal salary structure

1. Conveyance allowance up to a limit of Rs 9,600 per annum (Rs 800 per month) is exempt from tax.
2. Reimbursement of medical expenses to the extent of Rs 15,000 per annum is not considered a taxable perquisite. In other words, it is exempt from tax.
3. Refreshment during working hours provided to the employees outside the place of work upto Rs 35 per day is tax free, provided the amount is paid by the employer directly to the caterer, restaurant, or canteen. Thus, considering 325 working days in a year, this tax free perquisite will amount to Rs 11,375.
4. Any sum paid by the employer in respect of any premium paid by the employee to effect or to keep in force an insurance on employee's health or that of any member of his family under any scheme approved by the Central Government for the purpose of Mediclaim is not taxable as a perquisite in the hands of an employee.
5. Leave Travel Concession (LTC) from the employer for the employee and his family with regard to going on leave to any place in India is exempt to the extent of the actual expenditure.
6. House Rent Allowance (HRA) to the employees is exempt. The amount exempt equals the least of the following: actual HRA; 50 per cent of salary in metros or 40 per cent of salary in other states; and excess of rent paid over 10 per cent of salary. The exemption is subject to the condition that the employee does not own a house and actually pays rent.

In view of the above, the pay package of an employee can be structured in such a way that he or she can avail of the benefit of tax-free perquisites and allowances. If the existing salary structure does not take care of these tax-free perquisites and allowances, the benefit of these perquisites and allowances can be passed on to the employee indirectly. This can be done by reducing the basic pay of the employee and giving him the benefit of the perquisites and allowances. The estimated tax saving on account of this is shown in The Ideal Package.

Tax-effective options: Public Provident Fund (PPF)

PPF gives a rate of return of 11 per cent p.a., which is compounded annually. The maturity period of PPF is 15 years, after which the subscriber can opt to continue for five more years. The interest earned from PPF is totally exempt from tax. Further, the amount deposited (upto Rs 60,000, even in the account of a minor son/daughter) qualifies for tax rebate under Section 88. However, no withdrawal can be made till the seventh financial year. Only one withdrawal is permissible thereafter. Further, the amount of the withdrawal cannot exceed 50 per cent of the balance at the end of the fourth immediately preceding year or at the end of the preceding year, whichever is lower. The Public Option shows the accumulated amount in PPF account after the end of 15 and 25 years.

PPF is a good investment option as it gives attractive return, if one takes into account the benefit of rebate available under Section 88. If liquidity is not a problem, PPF is an ideal scheme for investment to fund expenditures like children's education, daughter's marriage, or purchase of a house.

LIC's Jeevan Suraksha

This scheme provides tax relief under Section 80 CCC on premium upto Rs 10,000. Premium can be paid either monthly, quarterly, half yearly or yearly. An individual below the age of 50 years has the option to combine life insurance with pension. However, people above the age of 50 years cannot take advantage of insurance cover. The plan provides for a life-long monthly pension with an option to commute 25 per cent of the corpus tax free. Alternatively, annuity can be guaranteed for 5, 10 or 15 years to ensure payments for the balance period to the family in case of death of an individual. The minimum and maximum entry ages are 30 and 60 years, respectively. The minimum and maximum investing ages are 55 and 70 years respectively. The term of policy can be 5 to 35 years. Nomination facility is also available. Covered For Life and Commuted Coverage show the benefits at retirement free of tax.

The Jeevan Suraksha scheme provides financial security to the retired person by paying 25 per cent tax free commuted pension and monthly pension. At the same time, it gives an annuity to the family members for certain number of years after the death of a person. Further, where life insurance is not covered and death occurs after three policy years, it returns the premium with interest. All these benefits with deduction under Section 80 CCC upto Rs 10,000 make the scheme attractive for retired individuals. However, the scheme looks more attractive, if a person opts for the same at the age of 30 years.

LIC's Jeevan Akshay

The minimum investment under the scheme is Rs 10,000. Further, only individuals above the age of 50 years can avail the benefit of the scheme. under the scheme, a monthly pension of 1 per cent (12 per cent per annum) of the investment will be paid during the lifetime of the person. The investment made in the scheme qualifies for tax rebate under Section 88. The monthly pension received is fully taxable but tax will not be deducted at source. The person will not get back the amount invested in the scheme in the normal course. It will only be paid on his death to his nominee. The investment amount and bonus received under the scheme by nominees/legal heirs on death of the person are not liable to income-tax.

The Jeevan Akshay scheme appears to be better than Jeevan Suraksha for the person whose age is 50 years and above. The person gets tax rebate under Section 88 and interest at the rate of 1 per cent per month in the period of continuous decline in interest rates. However, the amount invested in the scheme is locked up for the investor's life-time. If the person has other sources of regular income, this scheme provides post-retirement security.

UTI's Monthly Income Plan

The MIP scheme, 2000, is expected to offer interest at the rate of 9.5-10 per cent per month. This interest rate is assured for one year only. In other words, it is subject to change in subsequent years of the scheme. The MIP scheme is normally for a period of 5 years. The minimum investment for monthly income option is Rs 10,000 and there is no maximum limit. The interest received is fully exempt under the Income Tax Act. The funds invested in MIP are blocked for a minimum period of three years, after which the units can be sold to UTI at the NAV-based price.

The effective after tax return under the Jeevan Akshay scheme for a person falling in the highest tax bracket is only 7.86 per cent. And the funds are blocked for a life-time. Compared to that, MIP offers tax-free interest at the rate of 9.5 to 10 per cent per month and the investment is blocked for three years only. However, interest under MIP is assured for one year only. And unlike Jeevan Akshay scheme, the person does not get tax rebate under Section 88 for the amount invested in MIP. After taking into consideration these factors, the person should select either MIP or Jeevan Akshay. However, as stated earlier, for the person who is in the age group of 30 years and falling in the highest tax bracket, Jeevan Suraksha is the best investment for financial security after his retirement.

Ideal Salary structure and Tax: effective investment for three families

Siraj and Rubia. Siraj and Rubia reside in an office flat. As they do not pay rent, they can not take advantage of HRA. However, they will be entitled to all other benefits and their combined taxable salary will reduce to the extent of Rs 1,21,950, which will result in a tax saving of Rs 42,073. Thus, the amount available for investment per month will rise by Rs 3,506.

Considering that their monthly saving is Rs 20,000, the expenditure of Rs 25 lakh after 18 years for their son's education and Rs 10 lakh after 20 years for their daughter's marriage should not be a problem. However, it is advisable to deposit Rs 15,000 and Rs 40,000 every year in their daughter's and son's account, respectively, for 20 years. The advantages are: the children pay no gift-tax; the parents get tax rebate under Section 88; and the daughter and son will get tax-free capital of Rs 10,68,977 and Rs 28,50,606, respectively, at the end of 20 years.

Shailesh and his wife. Shailesh and his wife reside in an office apartment. As they are not paying any rent, they can not take advantage of HRA. However, they will be entitled to all other benefits and their combined taxable salary will reduce to the extent of Rs 1,21,950. This will result in a tax saving of Rs 42,073 for the year. As such, the amount that will be available for investment per month will increase by Rs 3,506.

Considering that their yearly saving is Rs 1,80,000, Shailesh and his wife can opt for a mixture of investment schemes to fund the expenditure on children's education and a house. They can deposit Rs 60,000 every year in a PPF account, which will give them tax-free capital of Rs 22,91,396 at the end of 15 years. However, since the age of Shailesh and his wife is less than 50 year, they cannot go for Jeevan Akshay scheme. However, both of them should invest Rs 10,000 each in Jeevan Suraksha scheme. The said investment is allowed as deduction u/s 80 CCC from the taxable income. They are also eligible for life insurance cover. Further, when they attain the minimum vesting age of 55 years, they are eligible for 25 per cent tax free commuted pension and monthly pensions. Alternatively, annuity can also be guaranteed for 5, 10 or 15 years to ensure payments for the balance period to the family in case of death of an individual. The UTI MIP, which gives tax free return of 9.5-10 per cent per month, is also a good investment option. But the said rate of return is at present assured for one year only and is subject to market fluctuations.

Arnab Das and his wife. If Arnab Das and his wife are residing in their own flat, they cannot take advantage of HRA. However, they will be entitled for all other benefits and their combined taxable salary will reduce to the extent of Rs 1,21,950, which will result in tax saving of Rs 42,073 for the year. As such, the amount available for investment per month will increase by Rs 3,506.

The main concern for Arnab Das and his wife is that they should have monthly income of Rs 1,00,000 to meet the household expenditure (Rs 40,000 per month), and maintain their present lifestyle. Since Arnab is more than 50 years old, he can invest in Jeevan Akshay scheme, which gives 7.86 per cent post tax return. Further, an investment in the Jeevan Akshay scheme upto Rs 60,000 is eligible for tax rebate u/s 88.

The interest earned every month under the Jeevan Akshay Scheme can be deposited in the Jeevan Suraksha scheme. The said deposit in Jeevan Suraksha scheme is allowed as deduction under Scheme 80 CCC from the taxable income. Arnab will get a monthly pension even under the Jeevan Suraksha scheme. Even his wife can opt for the Jeevan Suraksha Scheme and she will get life insurance cover also as she is less than 50 years old. We believe UTI MIP is the best investment option for Arnab and his wife, as it gives a tax-free return of 9.5-10 per cent per month.

Clearly, with a little diligence tax incidence can be minimised and investible savings can be generated. All the three couples in the exercise can save while, complying with the tax regulations, and enhance their wealth proactively.

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