Personal Finance: The Taxman Cometh

PERSONAL FINANCE: TAX PLANNING
The Taxman Cometh

Not everybody is a chartered accountant or has a head for numbers. That's a bad excuse for not planning tax. Here's a good reason for doing it, though. It saves you money and, hey, it ain't rocket science.

By Shilpa Nayak

The missive hits you like a tonne of bricks. It's the year beginning, and the accounts department has sent a memo reminding you of your tax deductions: invest Rs 75,000 by month end or kiss your month's salary goodbye. That's right. The tax planning that you had been putting off since September last has finally caught up with you. Scrape your bank balance, borrow, or do what you will, but that payment has to be made. Too bad if the car upgrade, or the Swatch watch you were hankering after, won't happen next month. You know what's really bad about being in a fix like this? Knowing that just a little bit of care and planning could have saved you all this. It's probably too late for this year, but here's a BT Tax Planner's Guide that will save you from the last-minute rush in March, 2002.

Tackling Taxes

Broadly, there are two ways of saving taxes. One is to claim all permissible deductions from income, and two is to invest in schemes that give you tax rebates. Your aim should be to utilise such tax savers to your maximum benefit. That said, it's equally important that the way you mix and match your investment portfolio reflect your financial constraints and long-term objectives. A thirty-something executive would be well advised to go in for aggressive savings, whereas somebody older might need more liquidity to manage the expenses of a larger household. Says Kirit Sanghvi, a Mumbai-based Chartered Accountant and Financial Advisor: ''Consider half the battle won if you plan ahead and figure out what your funds requirement is going to be in the year ahead.''

Even before you start drawing up your list of investments, it pays to know what deductions you can make to lower your taxable income. For example, contributions up to Rs 10,000 to LIC's pension scheme, Jeevan Suraksha, are deductible. Similarly, medical insurance premium or health insurance for your spouse, dependent children, parents, and yourself, is deductible under Section 80d. The permissible deduction is the actual premium paid or Rs 10,000 whichever is less (it is Rs 15,000 in the case of senior citizens).

If you have a handicapped dependent, then you can claim a deduction of Rs 40,000 on expenses incurred on maintenance or medical treatment. Money spent on treatment of specific diseases like cancer and aids is also deductible under Sec. 80ddb to a maximum of Rs 40,000. In case you are repaying a higher study loan, you are entitled to take a deduction of as much as Rs 40,000. The deduction starts from the first year of repayment to a maximum of seven consecutive assessment years.

You probably know this, but housing rent in excess of 10 per cent of the total income (or Rs 2,000 a month, whichever is lower) is entitled to a deduction under Sec. 80 GG. Also, interest or dividend income received from investments in bank deposits, post office time or recurring deposits, national savings certificate and debentures or bonds of approved public sector undertakings are tax-deductible. And, in case you receive foreign exchange from a university or a company by way of a service fee, the entire amount is deductible.

Invest To Save

Make The Most
Of Tax Breaks

Siddarth Bhat, 30, a banker, makes a pf contribution of Rs 15,000 per year to his company pf account. He also repays a housing loan of Rs 24,000 per year. Now, how much should he invest so as to get a maximum tax break of Rs 16,000? The eligible amounts that he is already paying are: a Provident Fund contribution of Rs 15,000 and a housing loan repayment of Rs 24,000 (restricted to Rs 20,000 under Section 88). To get to the total general limit of Rs 80,000, Siddharth needs to invest Rs 45,000 more. Being young and not risk-averse, Siddarth should invest Rs 10,000 in an ELSS, Rs 20,000 in infrastructure bonds and the balance Rs 15,000 either in PPF, NSC, LIC premium, NSS, or a combination of all of these. Since infrastructure-related instruments afford a higher ceiling of Rs 20,000, it makes good sense to invest in these instruments. This sort of a portfolio would allow Siddarth to claims the maximum tax rebate of Rs 16,000 on his investments of Rs 80,000.

It's more than likely that you may not get to claim all the deductions mentioned in the preceding paras. Not to worry. There is a whole range of investments that offer tax rebates. For instance, schemes like the Pension Provident Fund (PPF), NSC, Unit Linked Insurance Plan (ULIP), LIC Premiums, and Equity linked Saving Schemes get you a 20 per cent rebate at a maximum investment of Rs 60,000. Investments in infrastructure-related instruments like IDBI and ICICI bonds have a higher limit (Rs 80,000).

To stretch your rebate, try to invest as much as possible in infrastructure bonds. Here's why: Let's say you want to invest Rs 80,000. It's a better idea to apportion, say, Rs 30,000 to infrastructure bonds and the rest to PPF, NSC, and LIC premium, because you get a 20 per cent rebate on Rs 80,000. At the same time, don't overdo infrastructure investments because they do not provide returns as well as PPF. "Managing the returns trade-off is important for maximising gains," says Dinesh Baldia, a Mumbai-based chartered accountant and financial advisor.

If you are the sort who believes in long-term investing and isn't totally risk-averse, this one's for you. The equity-linked savings schemes (ELSS) from mutual funds give you a tax break of 20 per cent of the amount invested under Section 88. While the maximum one can invest is Rs 10,000 in such schemes, the benefit is the three-year lock-in period. After a three-year tenure, you can either withdraw from the scheme at the prevailing re-purchase price or continue without the benefit of rebate. The plus: the returns on equity investments have always been better over a longer period of time.

Investing in a house is a good tax-saving option too. For one, interest payments of up to Rs 1 lakh on housing loans are tax-deductible. For another, Section 88 gives you a 20 per cent rebate on the principal amount re-paid, up to a maximum of Rs 20,000 (within the overall limit of Rs 60,000). ''Lending rates are reasonable, service is better, and lenders are flexible to your needs. Besides, you save on taxes and build your own house in the bargain,'' says Baldia. And you thought tax planning was a bore.

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