Advances from EPF Account
The members are eligible to withdraw monies as advances from their EPF Account for purposes like -
Marriage,
Higher Education,
Medical Treatment,
Purchase of Site and Construction,
Alteration / Modification of House.,
Repayment of outstanding principal / Int. of a loan obtained from State Govt, Regd Co-operative Society, State Housing Board, Nationalized Bank and Public Financial Institution.
subject to the prescribed conditions as mentioned here below.
Note that the said advance is totally tax-free and interest-free.
Marriage
- only for self, son, daughter, brother & sister
- the member should have completed at least 7 years of service (not necessarily with the same employer, but should have transferred the PF monies from previous employers for consecutive period of 7 years)
- maximum of 3 times in the entire service
- maximum amount is 50% of employee’s share at the time of tendering application.
- the member should apply in Form 31 through employer
- marriage Invitation card should be submitted along with form as proof for marriage through employer.
Education
- only for self, son & daughter
- the member should have completed at least 7 years of service (not necessarily with the same employer, but should have transferred the PF monies from previous employers for consecutive period of 7 years)
- maximum of 3 times in the entire service
- maximum amount is 50% of employee share at the time of tendering application
- the member should apply in Form 31 through employer
- Bonafide certificate duly indicating the fees payable from the educational institution.
For Medical Treatment
- only for self, spouse, son, daughter, dependent father & mother
- applicable for major surgical operation in a hospital and 1 month or more hospitalization for the operation or suffering from TB, leprosy, paralysis, cancer, mental derangement or heart ailment.
- For this purpose, no minimum service is required.
- The members should obtain certificate from ESI or from employer that E.S.I. facility are not available for the member.
- A doctor (or registered medical practitioner) of the hospital certifies that a surgical operation or hospitalization for 1 month or more is/was necessary.
- Incase of TB or leprosy etc, a specialist doctor should certify
- Maximum amount given is 6 times of wages or full employee share, whichever is less.
- A certified proof for the said decease has to be submitted along with the application in Form 31 through employer.
For Purchase of Site and Construction there on
- Should have completed 5 years of services
- members contribution with interest should not be less than 1,000
- Site should be free from encumbrances
- Site should be in the name of the member or spouse of the member or in the joint names of the member and the spouse
- The maximum amount given is least of Basic+DA for 24 months or total contribution & Interest or total cost of site.
Purchase of Flat/House (from agency/promoter)
- Should have completed 5 years of services
- members contribution with interest should not be less than 1,000
- House/Flat should be free from encumbrances
- Flat/house should be in the name of the member or spouse of the member or in the joint names of member & spouse.
- The Agreement with the Flat promoter should be registered under the Indian Registration Act.
- The maximum amount given is least of Basic+DA for 36 months or total contribution & Interest or total cost of site.
Alteration / Modification of House
- Should have completed 5 years of services
- only after 5 years of completion of construction of dwelling house
- the maximum amount given is 12 months Basic+DA or member share of contribution with interest, whichever is less.
Repayment of outstanding principal / Int. of a loan obtained from State Govt, Regd Co-operative Society, State Housing Board, Nationalized Bank and Public Financial Institution.
- Should have completed 10 years of services
- Member contribution with interest should be more than 1,000
- The amount will be paid directly to the agency and not to the member
- The maximum amount paid is 36 Months Basic + Members accumulation with interest or Outstanding Principal plus interest which is sought to be repaid, whichever is less.
Jul 25, 2010
Why should you invest in Post Office Schemes
- These schemes are offered by the Government of India.
- Safe, secure and risk-free investment options.
- No Tax Deduction at Source (TDS).
- Nomination facility is available.
- Nomination can be changed at any time
- The instruments are transferable to any Post Office anywhere in India.
- Attractive rates of interest.
Post Office Monthly Income SchemeGovt schemes also offered through Post Offices:
Post Office Time Deposit Scheme
Post Office Savings Account
National Savings Certificate
Kisan Vikas Patra
Public Provident Fund
Senior Citizen's Savings Scheme
Investment in Post Office Recurring Deposit
Any individual (a single adult or two adults jointly) can open an account. Advance Deposits earn rebate. Four defaults are allowed. Defaults can be paid within two months. Part withdrawal facility available. Premature closure allowed after three years. Pay Roll Savings Scheme is also available for employees of various Establishments. Type of Account Individual Account
Minimum Deposit INR. 10/- and in multiples of INR. 5/- thereafter
Maximum Deposit No limit.
Invest in Post Office Monthly Income Scheme (MIS)
Safe & sure way to get a regular monthly income. Specially suited for retired employees/ Senior Citizens or any one with high sum for investment Rate of interest 8%. Maturity Period - Six Years. 5% Bonus on Maturity. Post maturity Interest at the rate applicable from time to time (at present 3.5%) Auto credit facility to SB Account. Deposit in Monthly Income Scheme and invest interest in Recurring Deposit to get 10.5% (approx) interest. Above scheme operates automatically, if you open a saving bank account and give a request for automatic transfer of Monthly Income Scheme interest to Recurring Deposit through Saving Bank account. | ||
Benefits of Investing in Post Office Time Deposit Account.
| Period | Rate of Interest |
| One Year | 6.25% |
| Two years | 6.50% |
| Three years | 7.25% |
| Five years | 7.50% |
- Interest is calculated quarterly but payable annually.
- No interest is payable on undrawn interest amount.
- Minimum amount of deposit is Rs.200/-. No maximum limit.
- Account can be opened by an individual, two adults jointly and minor through guardian.
- A Minor who has attained the age of 10 years can open the account in his/her own name to be operated directly.
- Non Resident Indian / HUF can not open the account.
- Any number of accounts can be opened.
- Account can be closed after 6 months but before one year without any interest.
- Two, three and Five years accounts can be closed after one year at a discounted rate of interest.
- Facility of redeposit on maturity of an account.
- Deposits not drawn on maturity are eligible to saving account interest rate for a maximum period of two years.
- Account can be pledged as security against a loan to banks/ Government institutions.
- Accounts are transferable from one Post office to any Post office in India.
- Rebate under section 80-C is not admissible.
- Interest income is taxable.
- Deposits are exempt from wealth tax.
- No T.D.S.
- Nomination facility available.
-
Post Office Savings Bank - The safest investment"Pay Day is your Savings Day "
Investment in POST OFFICE SAVINGS Account
- Minimum amount Rs20/- in case of non- cheque account, Rs.500/- in case of cheque account.
- Minimum balance of Rs.500/- is to be maintained for a cheque account.
- Account is opened with cash only.
- Maximum balance permissible Rs. 1,00,000/- in a single account and 2,00,000/- in Joint account.
- Two/Three adults, individuals, minor through guardian.
- A Minor having 10 years of age can also open an account directly.
- One individual account and one joint account can only be opened at a post office.
Savings Account
Deposit account & Official Capacity account are not permissible
Invest in National Savings Certificate (NSC)
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Jul 24, 2010
Invest in Kissan Vikas Patra
Money doubles in 8 years and 7 months. Facility for premature encashment as per the table given below (for the KVP purchased on or after 1st March 2003).
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Investment Limits and Denominations | ||||||||||||||||||||||||||
No limit on investment. Available in denominations of Rs.100,Rs. 500/-, Rs. 1,000/-, Rs. 5,000/-, Rs. 10,000/- in all post offices and Rs. 50,000/- in Head Post Offices. | ||||||||||||||||||||||||||
| Features and Tax Rebate | ||||||||||||||||||||||||||
 A Single Holder type certificate may be issued to: An adult for himself or on behalf of a minor or to a minor Can be purchased jointly by two adults A Trust. Interest accrued on early basis for Tax purposes. The Govt. of Maharashtra has declared the KVP as a "Public Security" under the provision of Mumbai Public Trust Act. 1950. Interest accrued on yearly basis will be taken as income for Income Tax purposesClick for more information on KVP... |
Jul 22, 2010
Kisan Vikas Patra
* Minimum Investment Rs. 500/- No maximum limit.
* Rate of interest 8.40% compounded annually.
* Money doubles in 8 years and 7 months.
* Two adults, Individuals and minor through guardian can purchase.
* Companies, Trusts, Societies and any other Institution not eligible to purchase.
* Non-Resident Indian/HUF are not eligible to purchase.
* Facility of encashment from 2 ½ years.
* Maturity proceeds not drawn are eligible to Post office Savings account interest for a maximum period of two years.
* Facility of reinvestment on maturity.
* Patras can be pledged as security against a loan to Banks/Govt. Institutions.
* Patras are encashable at any Post office before maturity by way of transfer to desired Post office.
* Patras are transferable to any Post office in India.
* Patras are transferable from one person to another person before maturity
* Duplicate can be issued for lost, stolen, destroyed, mutilated and defaced patras.
* Nomination facility available.
* Facility of purchase/payment of Kisan vikas Patras to the holder of Power of attorney.
* Rebate under section 80 C not admissible.
* Interest income taxable but no TDS
* Deposits are exempt from Wealth tax.
* Rate of interest 8.40% compounded annually.
* Money doubles in 8 years and 7 months.
* Two adults, Individuals and minor through guardian can purchase.
* Companies, Trusts, Societies and any other Institution not eligible to purchase.
* Non-Resident Indian/HUF are not eligible to purchase.
* Facility of encashment from 2 ½ years.
* Maturity proceeds not drawn are eligible to Post office Savings account interest for a maximum period of two years.
* Facility of reinvestment on maturity.
* Patras can be pledged as security against a loan to Banks/Govt. Institutions.
* Patras are encashable at any Post office before maturity by way of transfer to desired Post office.
* Patras are transferable to any Post office in India.
* Patras are transferable from one person to another person before maturity
* Duplicate can be issued for lost, stolen, destroyed, mutilated and defaced patras.
* Nomination facility available.
* Facility of purchase/payment of Kisan vikas Patras to the holder of Power of attorney.
* Rebate under section 80 C not admissible.
* Interest income taxable but no TDS
* Deposits are exempt from Wealth tax.
Benefits of Public Provident Fund Account (PPF)
* The Public Provident Fund Scheme is a statutory scheme of the Central
Government of India.
* The Scheme is for 15 years.
* The rate of interest is 8% compounded annually.
* The minimum deposit is 500/- and maximum is Rs. 70,000/- in a financial year.
* One deposit with a minimum amount of Rs.500/- is mandatory in each financial year.
* The deposit can be in lumpsum or in convenient installments, not more than 12 Installments in a year or two installments in a month subject to total deposit of Rs.70,000/-.
* It is not necessary to make a deposit in every month of the year. The amount of deposit can be varied to suit the convenience of the account holders.
* The account in which deposits are not made for any reasons is treated as discontinued account and such account can not be closed before maturity.
* The discontinued account can be activated by payment of minimum deposit of Rs.500/- with default fee of Rs.50/- for each defaulted year.
* Account can be opened by an individual or a minor through the guardian.
* Joint account is not permissible.
* Those who are contributing to GPF Fund or EDF account can also open a PPF account.
* A Power of attorney holder can neither open or operate a PPF account.
* The grand father/mother cannot open a PPF behalf of their minor
grand son/daughter.
* The deposits shall be in multiple of Rs.5/- subject to minimum amount of Rs.500/-.
* The deposit in a minor account is clubbed with the deposit of the account of the Guardian for the limit of Rs.70,000/-.
* No age is prescribed for opening a PPF account.
* Interest is not contractual but rate is notified by Ministry of Finance, Govt. of India, at the end of each year.
* The facility of first withdrawal in the 7th year of the account subject to a limit of 50% of the amount at credit preceding three year balance. Thereafter one Withdrawal in every year is permissible.
* Pre-mature closure of a PPF Account is not permissible except in case of death.
* Nominee/legal heir of PPF Account holder on death of the account holder can not continue the account, but account had to be closed.
* The account holder has an option to extend the PPF account for any period in a block of 5 years on each time.
* The account holder can retain the account after maturity for any period without making any further deposits. The balance in the account will continue to earn interest at normal rate as admissible on PPF account till the account is closed.
* One withdrawal in each financial year is also admissible in such account.
* The PPF scheme is operated through Post Office and Nationalized banks.
* PPF account can be opened either in Post Office or in a Bank.
* Account is transferable from one Post office to another and from Post office to Bank and from Bank to Post office.
* Account is transferable from one Bank to another bank as well as within the bank to any branch.
* Deposits in PPF qualify for rebate under section 80-C of Income Tax Act.
* The interest on deposits is totally tax free.
* Deposits are exempt from wealth tax.
* The balance amount in PPF in PPF account is not subject to attachment under any order or decree of court in respect of any debt or liability.
* Nomination facility available.
* Best for long term investment.
Government of India.
* The Scheme is for 15 years.
* The rate of interest is 8% compounded annually.
* The minimum deposit is 500/- and maximum is Rs. 70,000/- in a financial year.
* One deposit with a minimum amount of Rs.500/- is mandatory in each financial year.
* The deposit can be in lumpsum or in convenient installments, not more than 12 Installments in a year or two installments in a month subject to total deposit of Rs.70,000/-.
* It is not necessary to make a deposit in every month of the year. The amount of deposit can be varied to suit the convenience of the account holders.
* The account in which deposits are not made for any reasons is treated as discontinued account and such account can not be closed before maturity.
* The discontinued account can be activated by payment of minimum deposit of Rs.500/- with default fee of Rs.50/- for each defaulted year.
* Account can be opened by an individual or a minor through the guardian.
* Joint account is not permissible.
* Those who are contributing to GPF Fund or EDF account can also open a PPF account.
* A Power of attorney holder can neither open or operate a PPF account.
* The grand father/mother cannot open a PPF behalf of their minor
grand son/daughter.
* The deposits shall be in multiple of Rs.5/- subject to minimum amount of Rs.500/-.
* The deposit in a minor account is clubbed with the deposit of the account of the Guardian for the limit of Rs.70,000/-.
* No age is prescribed for opening a PPF account.
* Interest is not contractual but rate is notified by Ministry of Finance, Govt. of India, at the end of each year.
* The facility of first withdrawal in the 7th year of the account subject to a limit of 50% of the amount at credit preceding three year balance. Thereafter one Withdrawal in every year is permissible.
* Pre-mature closure of a PPF Account is not permissible except in case of death.
* Nominee/legal heir of PPF Account holder on death of the account holder can not continue the account, but account had to be closed.
* The account holder has an option to extend the PPF account for any period in a block of 5 years on each time.
* The account holder can retain the account after maturity for any period without making any further deposits. The balance in the account will continue to earn interest at normal rate as admissible on PPF account till the account is closed.
* One withdrawal in each financial year is also admissible in such account.
* The PPF scheme is operated through Post Office and Nationalized banks.
* PPF account can be opened either in Post Office or in a Bank.
* Account is transferable from one Post office to another and from Post office to Bank and from Bank to Post office.
* Account is transferable from one Bank to another bank as well as within the bank to any branch.
* Deposits in PPF qualify for rebate under section 80-C of Income Tax Act.
* The interest on deposits is totally tax free.
* Deposits are exempt from wealth tax.
* The balance amount in PPF in PPF account is not subject to attachment under any order or decree of court in respect of any debt or liability.
* Nomination facility available.
* Best for long term investment.
Jul 21, 2010
New Pension Scheme (NPS)
WITH the launch of New Pension Scheme (NPS) comes the government’s attempt to offer a first of its kind social security plan. The long awaited plan was finally launched on May 1, 2009 after being in the pipeline for five years. Wealth tries to answer the 10 most commonly asked questions about this scheme.
Q1. What is NPS?
NPS is a pension plan where you can invest during your working years and withdraw when you retire. Until May 1 2009, the plan was available for central government employees only. But it is now thrown open to the citizens of the country.
The current NPS launched is of tier-I type. The typical feature of tier I type plan is that it does not allow you to make any withdrawals before 60 years. However, there can be exceptions in situations like a medical emergency or buying your first house.
If you don't like the idea of this long lock in, you would need to wait for the tier II type of fund, which is yet to be launched. D Swarup, Chairman of Pension Fund Regulatory Development Authority (PFRDA), said in an interview with CNBC TV18, "The tier II plan will be out before the end of this year."
Q2. How does it work?
NPS works like a mutual fund (MF). If you want to invest in the NPS, you can choose from three funds or a mix of funds:
Fund E: This invests up to 50 per cent in the equity market
Fund C: This fund invests 100 per cent in corporate bonds
Fund G: This fund invests 200 per cent in government securities
If you are confused about how much to invest in which fund, you can leave it to the auto selection option. Through this option, 15 per cent of your money will be invested in equity, 45 per cent in corporate bond and 40 per cent in government bonds.
However, after 36 years of age, your equity and corporate bonds exposure will reduce, but it will be compensated with higher investment in government bonds. The maximum cap in government bonds will be 80 per cent. Equity and corporate bonds will have 10 per cent each investment proportion.
Q3. Whom should I approach to invest?
These fund are managed by six asset management companies (AMC): State Bank of India, UTI, ICICI Prudential, Kotak Mahindra, IDFC and Reliance, appointed by the PFRDA. Swarup says, "You have the liberty to choose, change your fund manager every year unlike mutual fund or unit linked insurance plans where you are tied to the same fund manger throughout the term of the product."
All AMCs have to follow the guidelines laid out by PFRDA since it’s the ruling authority.
Q4. How much can I invest?
If you are investing in the scheme, you will have to make a compulsory contribution of minimum Rs 6,000 annually or Rs 500 every month. Swarup, says, "You also have the flexibility to make weekly contribution, but it would involve transition cost, hence it is better to stick to minimum transactions."
The minimum age to enter the scheme is 18 years and the maximum is 55 years.
Q5. What about charges?
The best thing about this scheme is the fund management charge, which is a bare minimum of 0.0009 per cent! That is nowhere close to the charges by mutual funds or unit linked insurance companies which range from 1.5 per cent to 2.5 per cent per annum.
The application form will cost you Rs 40 and for every transaction you make, you will have to shell out Rs 20. Switching to another fund will cost you another Rs 20. However, you cannot make more than one switch every year. Apart from this, you will have to pay Rs 350 as annual maintenance charge to National Securities Depository Ltd. (NSDL), which is the central record keeping agency for all the individual pension accounts. Just like the way you pay an annual charge in maintaining your demat account, you will have to bear a cost for NPS too.
Q6. Do I get tax benefits?
Unlike retirement plan options, NPS doesn’t offer tax benefits under section 80 C and that’s the biggest drawback of the scheme. Currently, NPS falls under Exempt-Exempt-Tax (EET) system. This means that the maturity benefits that you will receive at the retirement stage will be taxable. However, Swarup assures that NPS will be brought at par with other schemes sooner than later.
Q7. How will I be paid on retirement?
Payments will be made once you reach 60 years of age. A part of your invested money will be paid out to you as lumpsum, and the balance will be mandatorily kept back as annuity. This annuity, which is the remaining amount left in your account, will be paid out to you as pension every month or year depending on what you choose. In case of your untimely death, your nomination will receive this pension.
Q1. What is NPS?
NPS is a pension plan where you can invest during your working years and withdraw when you retire. Until May 1 2009, the plan was available for central government employees only. But it is now thrown open to the citizens of the country.
The current NPS launched is of tier-I type. The typical feature of tier I type plan is that it does not allow you to make any withdrawals before 60 years. However, there can be exceptions in situations like a medical emergency or buying your first house.
If you don't like the idea of this long lock in, you would need to wait for the tier II type of fund, which is yet to be launched. D Swarup, Chairman of Pension Fund Regulatory Development Authority (PFRDA), said in an interview with CNBC TV18, "The tier II plan will be out before the end of this year."
Q2. How does it work?
NPS works like a mutual fund (MF). If you want to invest in the NPS, you can choose from three funds or a mix of funds:
Fund E: This invests up to 50 per cent in the equity market
Fund C: This fund invests 100 per cent in corporate bonds
Fund G: This fund invests 200 per cent in government securities
If you are confused about how much to invest in which fund, you can leave it to the auto selection option. Through this option, 15 per cent of your money will be invested in equity, 45 per cent in corporate bond and 40 per cent in government bonds.
However, after 36 years of age, your equity and corporate bonds exposure will reduce, but it will be compensated with higher investment in government bonds. The maximum cap in government bonds will be 80 per cent. Equity and corporate bonds will have 10 per cent each investment proportion.
Q3. Whom should I approach to invest?
These fund are managed by six asset management companies (AMC): State Bank of India, UTI, ICICI Prudential, Kotak Mahindra, IDFC and Reliance, appointed by the PFRDA. Swarup says, "You have the liberty to choose, change your fund manager every year unlike mutual fund or unit linked insurance plans where you are tied to the same fund manger throughout the term of the product."
All AMCs have to follow the guidelines laid out by PFRDA since it’s the ruling authority.
Q4. How much can I invest?
If you are investing in the scheme, you will have to make a compulsory contribution of minimum Rs 6,000 annually or Rs 500 every month. Swarup, says, "You also have the flexibility to make weekly contribution, but it would involve transition cost, hence it is better to stick to minimum transactions."
The minimum age to enter the scheme is 18 years and the maximum is 55 years.
Q5. What about charges?
The best thing about this scheme is the fund management charge, which is a bare minimum of 0.0009 per cent! That is nowhere close to the charges by mutual funds or unit linked insurance companies which range from 1.5 per cent to 2.5 per cent per annum.
The application form will cost you Rs 40 and for every transaction you make, you will have to shell out Rs 20. Switching to another fund will cost you another Rs 20. However, you cannot make more than one switch every year. Apart from this, you will have to pay Rs 350 as annual maintenance charge to National Securities Depository Ltd. (NSDL), which is the central record keeping agency for all the individual pension accounts. Just like the way you pay an annual charge in maintaining your demat account, you will have to bear a cost for NPS too.
Q6. Do I get tax benefits?
Unlike retirement plan options, NPS doesn’t offer tax benefits under section 80 C and that’s the biggest drawback of the scheme. Currently, NPS falls under Exempt-Exempt-Tax (EET) system. This means that the maturity benefits that you will receive at the retirement stage will be taxable. However, Swarup assures that NPS will be brought at par with other schemes sooner than later.
Q7. How will I be paid on retirement?
Payments will be made once you reach 60 years of age. A part of your invested money will be paid out to you as lumpsum, and the balance will be mandatorily kept back as annuity. This annuity, which is the remaining amount left in your account, will be paid out to you as pension every month or year depending on what you choose. In case of your untimely death, your nomination will receive this pension.
Gift Tax – The latest change in rules
High Value Gifts were a safe haven to show one’s love to others financially. Now the tax man has tightened (putting it mildly) the strings attached to gifts. In fact the rule has become so tight that it may be the end for all high value gifts in India.
Gift Tax Earlier
Since 1998, there is no Gift Tax per say in India. The gift is added to the income of the receiver and is taxed accordingly. Earlier (prior to October 1st 2009), gifts in kind (a car or a house) were not considered at the cash value.
Also all gifts received at the time of marriage were exempt from tax. The gifts could have been from anyone and of any type. This made very high value gifts the norm at the marriages of very rich people. The taxman was hoodwinked by making marriages occasions for large scale conversion of illegal money (black money) into legal gifts.
The New Rule
The change in the rule related to gifts says that the receiver has to pay tax for receiving any gift valued at Rs.50,000 and more. The 'any gift' clause means that not only cash but all gifts of any value. So if someone receives a gift of a house worth Rs.30 lakhs, then he/she is automatically in the highest income bracket and has to pay 30% + surcharge on value of the house as tax (close to Rs.10 lakhs in this case).
The rule thus effectively prevents money laundering in the guise of high value gifts.
Which Donors' Gifts are Exempt
There is exemption for gifts received from certain people. The gifts that one receives from relatives on the occasion of marriage, the gifts receives from parents and grand parents, the gift received by a daughter-in-law from her parents-in-law, and gifts received by way of a will and inheritance are exempt.
The gifts received by a son-in-law from his parent-in-law will be taxed.
An NRI can gift to his/her parents in India from their NRE account without their parents suffering any tax.
Gifts Received by Children
The gifts received in the names of one's minor children will be clubbed with the parents' income for taxation purpose. Also the taxman is very alert in saying that, in case of both parents having income, clubbing will be done with that parent who is earning more. So one cannot hide under the cover of their minor child(ren) receiving the gifts.
Other Deals that Comes under the Hammer
Not only gifts, but any real estate deal done for values lower than the state governments fixed rates, will also be taxed. Here the tax will be charged on the difference between the state government’s rate and purchase price. The tax needs to be paid by the buyer of the property.
Conclusion
The tightening of the rules related to gift tax will curb money laundering to a great extent. However it does protect genuine gifts from relatives and loved ones. Several guises used earlier to cover up transactions as gifts are now taxable.
Gift Tax Earlier
Since 1998, there is no Gift Tax per say in India. The gift is added to the income of the receiver and is taxed accordingly. Earlier (prior to October 1st 2009), gifts in kind (a car or a house) were not considered at the cash value.
Also all gifts received at the time of marriage were exempt from tax. The gifts could have been from anyone and of any type. This made very high value gifts the norm at the marriages of very rich people. The taxman was hoodwinked by making marriages occasions for large scale conversion of illegal money (black money) into legal gifts.
The New Rule
The change in the rule related to gifts says that the receiver has to pay tax for receiving any gift valued at Rs.50,000 and more. The 'any gift' clause means that not only cash but all gifts of any value. So if someone receives a gift of a house worth Rs.30 lakhs, then he/she is automatically in the highest income bracket and has to pay 30% + surcharge on value of the house as tax (close to Rs.10 lakhs in this case).
The rule thus effectively prevents money laundering in the guise of high value gifts.
Which Donors' Gifts are Exempt
There is exemption for gifts received from certain people. The gifts that one receives from relatives on the occasion of marriage, the gifts receives from parents and grand parents, the gift received by a daughter-in-law from her parents-in-law, and gifts received by way of a will and inheritance are exempt.
The gifts received by a son-in-law from his parent-in-law will be taxed.
An NRI can gift to his/her parents in India from their NRE account without their parents suffering any tax.
Gifts Received by Children
The gifts received in the names of one's minor children will be clubbed with the parents' income for taxation purpose. Also the taxman is very alert in saying that, in case of both parents having income, clubbing will be done with that parent who is earning more. So one cannot hide under the cover of their minor child(ren) receiving the gifts.
Other Deals that Comes under the Hammer
Not only gifts, but any real estate deal done for values lower than the state governments fixed rates, will also be taxed. Here the tax will be charged on the difference between the state government’s rate and purchase price. The tax needs to be paid by the buyer of the property.
Conclusion
The tightening of the rules related to gift tax will curb money laundering to a great extent. However it does protect genuine gifts from relatives and loved ones. Several guises used earlier to cover up transactions as gifts are now taxable.
Calculating the Exemption of Gratuity From Tax
Gratuity is a payment made by the employer to an employee in appreciation of the past services rendered by the employee. The majority of the people are generally jumbled while the calculation of the exemption or taxable part of gratuity. Gratuity calculation is very simple with formulas of gratuity exemption’s calculation. We have described all formulas for calculation of the gratuity exemption step by step. You will also study the tax treatment of gratuity and important points to consider while receive the gratuity. You just require to find out in which category you fall as illustrated below.
Gratuity received by an employee on his retirement is taxable under the head “salary”. Gratuity is exempt upto a certain limit. For the calculation of exemption of gratuity under section 10(10), the employees are divided into 3 categories: -
* Government employee and employee of local authorities.
* Employee covered under the Payment of Gratuity Act, 1972
* Other employees not covered under the Payment of Gratuity Act, 1972
Exemption in the case of Government employees and employees of local authorities:
* The entire amount of death-cum-retirement received exempt from tax u/s 10(10)(i)
Exemption in the case of employees who have received gratuity under the payment of gratuity act, 1972
The minimum of the following amount is exempt from tax:
* The amount of gratuity actually received
* 15 days salary for every completed year of service or part thereof in excess of six months. However in the case of an employee who is employed in a seasonal establishment, and is not so employed throughout the year, theexemption shall be for seven days wages for each season.
* Rs. 3,50,000
Calculation of No. of Years of service rendered for calculating exemption of gratuity
* More than 6 months shall be taken as a completed year. A period of 6 months or less than 6 months shall be ignored. Suppose A has rendered service for 10 years and 7 months. The completed year will be treated as 11 year. B has rendered service for 10 years 5 months. The completed year will be 10 years forcalculation of gratuity.
Meaning of Salary:
* Basic Salary + D.A
Formula for calculation of gratuity
Gratuity = Salary on retirement x 15/26 x No. of years of service
Exemption in the case of other employees not covered under the payment of gratuity act, 1972
The minimum of the following amount is exempt from tax
* Actual amount of gratuity received
* Half month’s average salary for every completed year of service
* Rs. 3,50,000
Meaning of average salary:
* 10 months salary immediately preceding the months in which such event occurs. For example, of an employee retires on 2-1-2009, the average salary shall be taken as the aggregate of salary for the period from 1-3-2004 to 31-12-2004 divided by 10.
Meaning of Salary for calculation of gratuity in this case
* Basic Salary + D.A + Fixed Commission
Completed years of service:
* Only completed years to be taken
* Part of the year whether more or less than 6 months, will be ignored.
* Example: A retires after 12 years and 11 months, the period of service will be takes as 12 years only.
Gratuity received by an employee on his retirement is taxable under the head “salary”. Gratuity is exempt upto a certain limit. For the calculation of exemption of gratuity under section 10(10), the employees are divided into 3 categories: -
* Government employee and employee of local authorities.
* Employee covered under the Payment of Gratuity Act, 1972
* Other employees not covered under the Payment of Gratuity Act, 1972
Exemption in the case of Government employees and employees of local authorities:
* The entire amount of death-cum-retirement received exempt from tax u/s 10(10)(i)
Exemption in the case of employees who have received gratuity under the payment of gratuity act, 1972
The minimum of the following amount is exempt from tax:
* The amount of gratuity actually received
* 15 days salary for every completed year of service or part thereof in excess of six months. However in the case of an employee who is employed in a seasonal establishment, and is not so employed throughout the year, theexemption shall be for seven days wages for each season.
* Rs. 3,50,000
Calculation of No. of Years of service rendered for calculating exemption of gratuity
* More than 6 months shall be taken as a completed year. A period of 6 months or less than 6 months shall be ignored. Suppose A has rendered service for 10 years and 7 months. The completed year will be treated as 11 year. B has rendered service for 10 years 5 months. The completed year will be 10 years forcalculation of gratuity.
Meaning of Salary:
* Basic Salary + D.A
Formula for calculation of gratuity
Gratuity = Salary on retirement x 15/26 x No. of years of service
Exemption in the case of other employees not covered under the payment of gratuity act, 1972
The minimum of the following amount is exempt from tax
* Actual amount of gratuity received
* Half month’s average salary for every completed year of service
* Rs. 3,50,000
Meaning of average salary:
* 10 months salary immediately preceding the months in which such event occurs. For example, of an employee retires on 2-1-2009, the average salary shall be taken as the aggregate of salary for the period from 1-3-2004 to 31-12-2004 divided by 10.
Meaning of Salary for calculation of gratuity in this case
* Basic Salary + D.A + Fixed Commission
Completed years of service:
* Only completed years to be taken
* Part of the year whether more or less than 6 months, will be ignored.
* Example: A retires after 12 years and 11 months, the period of service will be takes as 12 years only.
How can I save Taxes this year?
Some of the Sections of Income Tax Act, 1961 are detailed below which detail few exemptions and categories of exempt income that you can take advantage of:
Section 80C: Investment in specified instruments and expenses
Section 80C gives every income tax payer up to a maximum of Rs. 1,00,000 tax free income in a year if they invest in or buy the following instruments. Please not that this is a combined total of Rs. 1,00,000 and not an individual figure for every instrument:
1. Premium for Life Insurance or ULIP
2. Provident Fund (PF) contribution
3. Public Provident Fund (PPF) - only up to Rs. 70,000 in a year
4. Repayment of home loan principal
5. Equity Linked Savings Schemes (ELSS) of Mutual Fund Companies
6. Infrastructure Bonds
7. National Savings Certificates (NSC)
8. Tax Saving Fixed Deposits with Banks
9. Tuition Fees of children
Notes:
1: ULIP premium needs to be at least 1/5th of the sum assured to qualify under Section 80C
2: PPF returns are set by the Government of India and can be revised either upwards or downwards in any year.
Section 80D: Health Insurance Premium
You can take advantage of an annual deduction of Rs. 15,000 from taxable income for payment of Health Insurance premium for self and dependants. For senior citizens, this deduction is Rs. 20,000.
Section 80E: Interest paid on educational loans
You can claim a deduction on the interest paid on loans taken for higher education for yourself, your spouse and children. There is no limit on the amount of deduction you can claim.
The only thing to keep in mind is that the program for which the loan is taken should be a graduate or post-graduate program in engineering, medicine or management or a post-graduate course in the pure or applied sciences.
Section 80G: Donations to Charitable institutions
You can claim a deduction for any donation that you might have made to a charitable fund or institution. However, please note that these donations should be made only to specified institutions. And a proper proof of payment must be provided for the same. Based on the classification of the charity , you can claim either 100% or 50% of the donated amount as deduction. The deduction might also be subject to a certain limit again based on the type of charity that you are donating money
Section 24: Interest paid on housing loan
Under Section 24, a maximum of Rs 1,50,000 can be deducted from your taxable income as interest repayment for a self occupied house. Please note that this deduction is not available if you the house is still under construction and you do not have occupation of the house.
Provisions that you should take advantage of if you are a salaried employee:
Section 10(13A) : House Rent Allowance
You can take advantage of the provisions under this section if you are renting an accommodation. These provisions will not be available to you if you stay in a rent-free accommodation or live with your family or in your own house.
Under Section 10(13A), HRA is exempt to the least of the following: i) 50/40 per cent of basic salary= Dearness Allowance (if, applicable), ii) excess of rent paid over 10 per cent of basic salary; and iii) actual HRA received.
Lets illustrate this calculation with an example:
Assumptions
HRA per month = Rs 15,000
Basic monthly salary = Rs 30,000
Monthly rent = Rs 14,000
Rental accommodation is in Delhi.
Exemption
The HRA exemption would be the least of the following:
1. Actual amount of HRA: Rs 15,000
2. 50% of salary (basic component + dearness allowance) = 50% x (30,000 + 0) = Rs 15,000
3. Actual rent paid - 10% of salary (basic component + dearness allowance)= Rs 14,000 - [10% of (30,000 + 0)] = 14,000 – 3,000 = Rs 11,000
Rs 11,000 being the least of the three amounts will be the exemption from HRA.
The balance HRA of Rs 4,000 (15,000-11,000) would be taxable.
Please note that HRA exemptions are only available on submission of rent receipts or the rent agreement.
Paying Rent to parents or relatives
If you want to pay rent to your parents or any relatives (like uncle/cousin) whom you are staying with. You will need to treat them as landlords. And request the owner of the house (which will be one of your parents) to declare it in his/ her personal income tax return. This will prevent any litigation in the future.
Section 10 (14) Rule 2BB(10) : Transport Allowance
Transport allowance granted for commuting between your residence and place of work is exempt up to Rs. 800 a month. You can take advantage of this provision to get a tax exemption of Rs 9600 annually by providing your employer with bills or a self declaration.
Section 17(2) : Medical Reimbursement
You can claim exemption up to Rs 15,000 annually on actual expenditure incurred on your medical treatment or for treatment of any of your dependants. Moreover, there is no restriction of approved hospitals or clinic for the same. This is exempt only on provision of actual bills.
However, if the amount is paid out as an allowance not a reimbursement then it would be fully taxable.
Section 80C: Investment in specified instruments and expenses
Section 80C gives every income tax payer up to a maximum of Rs. 1,00,000 tax free income in a year if they invest in or buy the following instruments. Please not that this is a combined total of Rs. 1,00,000 and not an individual figure for every instrument:
1. Premium for Life Insurance or ULIP
2. Provident Fund (PF) contribution
3. Public Provident Fund (PPF) - only up to Rs. 70,000 in a year
4. Repayment of home loan principal
5. Equity Linked Savings Schemes (ELSS) of Mutual Fund Companies
6. Infrastructure Bonds
7. National Savings Certificates (NSC)
8. Tax Saving Fixed Deposits with Banks
9. Tuition Fees of children
Notes:
1: ULIP premium needs to be at least 1/5th of the sum assured to qualify under Section 80C
2: PPF returns are set by the Government of India and can be revised either upwards or downwards in any year.
Section 80D: Health Insurance Premium
You can take advantage of an annual deduction of Rs. 15,000 from taxable income for payment of Health Insurance premium for self and dependants. For senior citizens, this deduction is Rs. 20,000.
Section 80E: Interest paid on educational loans
You can claim a deduction on the interest paid on loans taken for higher education for yourself, your spouse and children. There is no limit on the amount of deduction you can claim.
The only thing to keep in mind is that the program for which the loan is taken should be a graduate or post-graduate program in engineering, medicine or management or a post-graduate course in the pure or applied sciences.
Section 80G: Donations to Charitable institutions
You can claim a deduction for any donation that you might have made to a charitable fund or institution. However, please note that these donations should be made only to specified institutions. And a proper proof of payment must be provided for the same. Based on the classification of the charity , you can claim either 100% or 50% of the donated amount as deduction. The deduction might also be subject to a certain limit again based on the type of charity that you are donating money
Section 24: Interest paid on housing loan
Under Section 24, a maximum of Rs 1,50,000 can be deducted from your taxable income as interest repayment for a self occupied house. Please note that this deduction is not available if you the house is still under construction and you do not have occupation of the house.
Provisions that you should take advantage of if you are a salaried employee:
Section 10(13A) : House Rent Allowance
You can take advantage of the provisions under this section if you are renting an accommodation. These provisions will not be available to you if you stay in a rent-free accommodation or live with your family or in your own house.
Under Section 10(13A), HRA is exempt to the least of the following: i) 50/40 per cent of basic salary= Dearness Allowance (if, applicable), ii) excess of rent paid over 10 per cent of basic salary; and iii) actual HRA received.
Lets illustrate this calculation with an example:
Assumptions
HRA per month = Rs 15,000
Basic monthly salary = Rs 30,000
Monthly rent = Rs 14,000
Rental accommodation is in Delhi.
Exemption
The HRA exemption would be the least of the following:
1. Actual amount of HRA: Rs 15,000
2. 50% of salary (basic component + dearness allowance) = 50% x (30,000 + 0) = Rs 15,000
3. Actual rent paid - 10% of salary (basic component + dearness allowance)= Rs 14,000 - [10% of (30,000 + 0)] = 14,000 – 3,000 = Rs 11,000
Rs 11,000 being the least of the three amounts will be the exemption from HRA.
The balance HRA of Rs 4,000 (15,000-11,000) would be taxable.
Please note that HRA exemptions are only available on submission of rent receipts or the rent agreement.
Paying Rent to parents or relatives
If you want to pay rent to your parents or any relatives (like uncle/cousin) whom you are staying with. You will need to treat them as landlords. And request the owner of the house (which will be one of your parents) to declare it in his/ her personal income tax return. This will prevent any litigation in the future.
Section 10 (14) Rule 2BB(10) : Transport Allowance
Transport allowance granted for commuting between your residence and place of work is exempt up to Rs. 800 a month. You can take advantage of this provision to get a tax exemption of Rs 9600 annually by providing your employer with bills or a self declaration.
Section 17(2) : Medical Reimbursement
You can claim exemption up to Rs 15,000 annually on actual expenditure incurred on your medical treatment or for treatment of any of your dependants. Moreover, there is no restriction of approved hospitals or clinic for the same. This is exempt only on provision of actual bills.
However, if the amount is paid out as an allowance not a reimbursement then it would be fully taxable.
Jul 19, 2010
Earning a regular salary? Save tax the smart way!
Earning a salary? Looking to save tax the smart way? Then you have two options.
First is salary restructuring and second is tax saving instruments. Here we take a look at both these options and how to use them effectively.
Salary restructuring: As the term implies, salary restructuring allows you to redesign your salary, so as to reduce your total tax liability. Here are some steps you can take in order to reduce your tax liability.
1. Do you need a house? Does your employer offer Rent Free Accommodation or House Rent Allowance? Then go for it, as the amount gets deducted from your total taxable income.
2. Does your company expect you to wear uniform at work? If so, the expenses incurred on buying and maintenance the uniform will not be taxed.
3. Does your employer provide you with allowance for your children's education and hostel accommodation? Then use it to claim exemption under section 10 (14).
4. Does your company provide you with a telephone facility in your home? Then it not taxed. However be warned against taking telephone allowance, since it is totally taxable and will increase your taxable income.
5. Opt for the car facility, since the value of the perk is much lower than the actual expenditure incurred on the car.
We all have to visit the doctor at some point of time. So save tax by claiming medical reimbursements up to Rs.15,000.00 p.a. But don't take any medical allowance, since it is completely taxable.
If your employer pays Fringe Benefit tax (FBT), then sum of fringe benefits, is tax-free for you. Also if salary is paid in arrears or in advance, claim relief under section 89 (1).
Always ask your employer to include dearness allowance and dearness pay along with commissions earned in your salary. It will lower your tax liability on house rent allowance, gratuity and pension.
If you are eligible for a pension, always get it commuted, as commuted pension is tax-free for government employees and partially exempted for others. You can get tax relief under section 89(1).
If your current employer is participating in an authorized provident fund, and you change your employer within 5 years of joining the firm, ensure your new employer is also a member of the authorized provident firm. It will let you transfer the corpus in your provident fund to the new company without paying any tax. Also insist your employer fix his contribution to your provident fund to 12% of your salary, as it is the highest limit for tax exemption.
Plan your retirement or resignation at the start of the financial year in order to lower the tax on retirement benefits.
As leave travel concession is not taxed if certain criteria are fulfilled, try to claim this incentive to the highest possible level, without having to pay any tax.
Let us assume your annual salary is Rs. 2,00,000. You get HRA of Rs. 10,000 and your medical reimbursement is Rs. 5,000. Your employer gives you an allowance of Rs. 15,000 for your son's educational expenses. So instead of Rs. 2,00,000 your total taxable salary now becomes Rs. 1,70,000 (2,00,000 - 10,000 - 5,000 - 15,000). This will effectively reduce your tax liability.
Now that we have seen how to design your salary let us take a look at the most effective tax saving instruments available.
Tax saving instruments: While these instruments do help you save tax, they have a maximum limit of Rs. 1,00,000. Any income above this limit attracts tax.
Insurance: All payments made towards both life and health insurance are eligible for tax benefits. Even contributions made towards pension payments can be eligible for tax benefits. Health insurance can let you save Rs. 15,000 over and above the ceiling of Rs. 1 lakh.
PPF: It is one of the safest tax saving investments available. Both interest and capital withdrawal from the fund are tax free. However its drawback is the lock-in period of 15 years.
NSC, Post office (CTD) accounts: These are government savings schemes available at post office, with a lock-in period of 5 years.
Bank deposits: These are special tax saving FDs offered by banks with a lock-in period of 5 years.
ELSS: These are tax savings instruments offered by mutual funds, with a lock-in period of 3 years. They invest in various quality stocks.
All these instruments carry different degrees of risks. While PPF, NSC, Post office accounts, insurance (except ULIPs) and FDs are safer, they offer lower returns and are not very liquid, due to their long lock-in period.
On the other hand, ELSS has a short lock-in period but is more risky, while ULIPs carry the risk of ELSS but without the liquidity benefit.
So while investing for tax saving purpose, take into account factors like your risk appetite, returns generated by the instrument, liquidity, capital appreciation and safety of capital. Remember, younger you are, riskier options are better for you, since over a long time, these instruments can generate higher returns for you, and minimize the risk of capital erosion. Also diversify your investment portfolio.
If these options are not enough for you, then here are some more:
Housing loan and education loan:
Donation to charities/religious trusts
To summarize, first thing to do is to structure your salary so as to minimize your tax liability. This will minimize the need to invest for tax saving. This is because as with any investment, you must have the necessary capital to invest. Also the instruments that tend to be safer, have a longer lock-in period with low returns.
This means you must keep on investing with fresh capital every year and in turn get meager returns. Those investments with higher returns mean you may not be able to withdraw your money even after the lock-in period, if the value of your investment is lesser than the capital invested. Take all these points into consideration before opting for tax saving plans.
First is salary restructuring and second is tax saving instruments. Here we take a look at both these options and how to use them effectively.
Salary restructuring: As the term implies, salary restructuring allows you to redesign your salary, so as to reduce your total tax liability. Here are some steps you can take in order to reduce your tax liability.
1. Do you need a house? Does your employer offer Rent Free Accommodation or House Rent Allowance? Then go for it, as the amount gets deducted from your total taxable income.
2. Does your company expect you to wear uniform at work? If so, the expenses incurred on buying and maintenance the uniform will not be taxed.
3. Does your employer provide you with allowance for your children's education and hostel accommodation? Then use it to claim exemption under section 10 (14).
4. Does your company provide you with a telephone facility in your home? Then it not taxed. However be warned against taking telephone allowance, since it is totally taxable and will increase your taxable income.
5. Opt for the car facility, since the value of the perk is much lower than the actual expenditure incurred on the car.
We all have to visit the doctor at some point of time. So save tax by claiming medical reimbursements up to Rs.15,000.00 p.a. But don't take any medical allowance, since it is completely taxable.
If your employer pays Fringe Benefit tax (FBT), then sum of fringe benefits, is tax-free for you. Also if salary is paid in arrears or in advance, claim relief under section 89 (1).
Always ask your employer to include dearness allowance and dearness pay along with commissions earned in your salary. It will lower your tax liability on house rent allowance, gratuity and pension.
If you are eligible for a pension, always get it commuted, as commuted pension is tax-free for government employees and partially exempted for others. You can get tax relief under section 89(1).
If your current employer is participating in an authorized provident fund, and you change your employer within 5 years of joining the firm, ensure your new employer is also a member of the authorized provident firm. It will let you transfer the corpus in your provident fund to the new company without paying any tax. Also insist your employer fix his contribution to your provident fund to 12% of your salary, as it is the highest limit for tax exemption.
Plan your retirement or resignation at the start of the financial year in order to lower the tax on retirement benefits.
As leave travel concession is not taxed if certain criteria are fulfilled, try to claim this incentive to the highest possible level, without having to pay any tax.
Let us assume your annual salary is Rs. 2,00,000. You get HRA of Rs. 10,000 and your medical reimbursement is Rs. 5,000. Your employer gives you an allowance of Rs. 15,000 for your son's educational expenses. So instead of Rs. 2,00,000 your total taxable salary now becomes Rs. 1,70,000 (2,00,000 - 10,000 - 5,000 - 15,000). This will effectively reduce your tax liability.
Now that we have seen how to design your salary let us take a look at the most effective tax saving instruments available.
Tax saving instruments: While these instruments do help you save tax, they have a maximum limit of Rs. 1,00,000. Any income above this limit attracts tax.
Insurance: All payments made towards both life and health insurance are eligible for tax benefits. Even contributions made towards pension payments can be eligible for tax benefits. Health insurance can let you save Rs. 15,000 over and above the ceiling of Rs. 1 lakh.
PPF: It is one of the safest tax saving investments available. Both interest and capital withdrawal from the fund are tax free. However its drawback is the lock-in period of 15 years.
NSC, Post office (CTD) accounts: These are government savings schemes available at post office, with a lock-in period of 5 years.
Bank deposits: These are special tax saving FDs offered by banks with a lock-in period of 5 years.
ELSS: These are tax savings instruments offered by mutual funds, with a lock-in period of 3 years. They invest in various quality stocks.
All these instruments carry different degrees of risks. While PPF, NSC, Post office accounts, insurance (except ULIPs) and FDs are safer, they offer lower returns and are not very liquid, due to their long lock-in period.
On the other hand, ELSS has a short lock-in period but is more risky, while ULIPs carry the risk of ELSS but without the liquidity benefit.
So while investing for tax saving purpose, take into account factors like your risk appetite, returns generated by the instrument, liquidity, capital appreciation and safety of capital. Remember, younger you are, riskier options are better for you, since over a long time, these instruments can generate higher returns for you, and minimize the risk of capital erosion. Also diversify your investment portfolio.
If these options are not enough for you, then here are some more:
Housing loan and education loan:
Donation to charities/religious trusts
To summarize, first thing to do is to structure your salary so as to minimize your tax liability. This will minimize the need to invest for tax saving. This is because as with any investment, you must have the necessary capital to invest. Also the instruments that tend to be safer, have a longer lock-in period with low returns.
This means you must keep on investing with fresh capital every year and in turn get meager returns. Those investments with higher returns mean you may not be able to withdraw your money even after the lock-in period, if the value of your investment is lesser than the capital invested. Take all these points into consideration before opting for tax saving plans.
ELSS Mutual Fund - A Tax Saver & wealth generator
Most of the tax saving instruments under Section 80C are savings oriented instruments with returns after adjusting for inflation either in the negative or slightly positive. The exceptions to this are the ULIPs (Life and Pension Funds) and the ELSS Mutual Funds. The advantage with ELSS compared to the ULIPs is the frequency (mostly a single investment or a monthly investment for a year) and term for investment, for getting good returns.
What is an ELSS?
An ELSS (Equity Linked Savings Scheme) is a mutual fund that has to invest a minimum of 80% in Equity Shares. The balance 20% can be in debt, money market instruments, cash or even more equity. There is a 3 year lock-in period for the ELSS mutual funds. Post the 36 months, the funds remain invested and work like any other open-ended mutual fund.
Why an ELSS?
It has been an established fact that in the long run equity gives a much higher inflation adjusted returns when compared to any other investment except for maybe real estate. The top 5 ELSS funds have given returns from 22% to 26% compounded annually over the past 5 years. This is again higher than the market (Nifty) returns over the past 5 years which is at 19%.
ELSS is part of the Section 80C instruments which are cumulatively eligible for a deduction from income up to Rs.1L. This gives the tax payers benefits from 10% to 30% (excluding the educational cess) based on their current tax slab.
The return (maturity and the dividend [(if opted for]) from the ELSS is also tax free under the present EEE (Exempt - Exempt - Exempt) regime.
The 3 year lock-in period makes sure one stays invested. Otherwise in a normal mutual fund one tends to withdraw in case of any monetary requirement.
The lock-in period also helps the fund managers to plan their investments better and also to hold on to valuable investments as they do not have to worry about sudden redemption pressures.
The above logic is proved in the higher returns achieved by the ELSS funds when compared to the market returns. Wealth creation because of this is much better than most of the other mutual funds. Only some sector based mutual funds have given better returns than the ELSS fund in the past 5 years.
Options with the ELSS
Salaried people with a tight budget can opt for a monthly investment (SIP using ECS). The automatic investment from the bank through ECS makes it an easy way to invest.
Those who want an income in between can opt for the dividend option. This is particularly suitable for senior citizens. Also, the ELSS gives a tax free return compared to a bank or company deposit, which is taxable.
Limitations with ELSS
The investment in an ELSS cannot be switched or closed before the 3 years are completed form the date of investment. During market downturns, this becomes a limitation as one can only sit and watch the funds go down. One has the option of averaging when the market goes down, but an investment to save tax may not be required in the year in which the market is going down.
The lock-in works negatively also for the monthly investment because the lock-in is calculated from the date of the investment and not from the date the scheme was started. This means that the 12th month's investment can be withdrawn only on the 48th month. This is a disadvantage compared to ULIPs, where the lock-in is from the date of start of the scheme.
ELSS - a favoured option
Most fund houses start an ELSS regular investment at Rs.500/- per month. Single investments start generally at Rs.5000/-. This makes ELSS accessible to all tax payers. With the compulsory lock-in giving better returns than other investments, even the most risk averse can look at an exposure to the ELSS fund for their tax benefits
What is an ELSS?
An ELSS (Equity Linked Savings Scheme) is a mutual fund that has to invest a minimum of 80% in Equity Shares. The balance 20% can be in debt, money market instruments, cash or even more equity. There is a 3 year lock-in period for the ELSS mutual funds. Post the 36 months, the funds remain invested and work like any other open-ended mutual fund.
Why an ELSS?
It has been an established fact that in the long run equity gives a much higher inflation adjusted returns when compared to any other investment except for maybe real estate. The top 5 ELSS funds have given returns from 22% to 26% compounded annually over the past 5 years. This is again higher than the market (Nifty) returns over the past 5 years which is at 19%.
ELSS is part of the Section 80C instruments which are cumulatively eligible for a deduction from income up to Rs.1L. This gives the tax payers benefits from 10% to 30% (excluding the educational cess) based on their current tax slab.
The return (maturity and the dividend [(if opted for]) from the ELSS is also tax free under the present EEE (Exempt - Exempt - Exempt) regime.
The 3 year lock-in period makes sure one stays invested. Otherwise in a normal mutual fund one tends to withdraw in case of any monetary requirement.
The lock-in period also helps the fund managers to plan their investments better and also to hold on to valuable investments as they do not have to worry about sudden redemption pressures.
The above logic is proved in the higher returns achieved by the ELSS funds when compared to the market returns. Wealth creation because of this is much better than most of the other mutual funds. Only some sector based mutual funds have given better returns than the ELSS fund in the past 5 years.
Options with the ELSS
Salaried people with a tight budget can opt for a monthly investment (SIP using ECS). The automatic investment from the bank through ECS makes it an easy way to invest.
Those who want an income in between can opt for the dividend option. This is particularly suitable for senior citizens. Also, the ELSS gives a tax free return compared to a bank or company deposit, which is taxable.
Limitations with ELSS
The investment in an ELSS cannot be switched or closed before the 3 years are completed form the date of investment. During market downturns, this becomes a limitation as one can only sit and watch the funds go down. One has the option of averaging when the market goes down, but an investment to save tax may not be required in the year in which the market is going down.
The lock-in works negatively also for the monthly investment because the lock-in is calculated from the date of the investment and not from the date the scheme was started. This means that the 12th month's investment can be withdrawn only on the 48th month. This is a disadvantage compared to ULIPs, where the lock-in is from the date of start of the scheme.
ELSS - a favoured option
Most fund houses start an ELSS regular investment at Rs.500/- per month. Single investments start generally at Rs.5000/-. This makes ELSS accessible to all tax payers. With the compulsory lock-in giving better returns than other investments, even the most risk averse can look at an exposure to the ELSS fund for their tax benefits
New Income Tax Slab for Financial Year 2010-11 (A.Y. 2011-12)
The following are the income tax rates announced in union budget 2010 applicable for financial year 2010-11.
Individual Male (Below the Age 65 Years)
Up to 1,60,000 NIL
From 1,60,001 to 5,00,000 10%
From 5,00,001 to 8,00,000 20%
Above Than 8,00,000 30%
Individual Female (Below the Age of 65 Years)
Up to 1,90,000 NIL
From 1,90,001 to 5,00,000 10%
From 5,00,001 to 8,00,000 20%
Above Than 8,00,000 30%
Senior Citizen (Above than 65 years of age)
Up to 2,40,000 NIL
2,40,001 to 5,00,000 10%
5,00,001 to 8,00,000 20%
Above Than 8,00,000 30%
Individual Male (Below the Age 65 Years)
Up to 1,60,000 NIL
From 1,60,001 to 5,00,000 10%
From 5,00,001 to 8,00,000 20%
Above Than 8,00,000 30%
Individual Female (Below the Age of 65 Years)
Up to 1,90,000 NIL
From 1,90,001 to 5,00,000 10%
From 5,00,001 to 8,00,000 20%
Above Than 8,00,000 30%
Senior Citizen (Above than 65 years of age)
Up to 2,40,000 NIL
2,40,001 to 5,00,000 10%
5,00,001 to 8,00,000 20%
Above Than 8,00,000 30%
Calculate and plan your tax investment thus help yourself save tax (money).
Section 80C
Under section 80C, the maximum deduction available is Rs. 1,00,000/- annually. you can utilise the maximum amount under this section to get tax benefit. Some of the schemes available to save tax under this section are:
* Public Provident Fund (PPF)
* National Savings Certificates (NSC)
* Post Office Scheme (POS)
* Kisan Vikas Patra (KVP)
* Life Insurance Premium
* Equity Linked Saving Schemes (ELSS)
* 5-Year fixed deposits with banks and Post Office
* Tuition fees paid for children's education (maximum 2 children)
Tax benefit on House Rent (HRA)
Please provide all documents pertaining to your rent to your company to calculate HRA and provide you a benefit u/s 10 of Income-tax Act.
Medical insurance
An individual who pays medical insurance premium for self or spouse/dependent children is allowed a deduction of up to Rs 15,000 pa under section 80D. An additional deduction of up to Rs 20,000 pa is allowed for premium payment made for parents. In case the parents are senior citizens, then the maximum deduction allowed is Rs 20,000 per year.
Educational loan
Salaried individuals who plan to pursue higher education should avail of an education loan as the entire interest is eligible for deduction under Section 80E. The loan can be for self, spouse or child from an approved charitable institution or a notified financial institution.
Donations
Subject to the stated limits, donations to specified funds/institutions are eligible for tax benefits under Section 80G.
Home Loan
Interest payments of upto Rs 150,000 per annum are eligible for deduction under Section 24
Under section 80C, the maximum deduction available is Rs. 1,00,000/- annually. you can utilise the maximum amount under this section to get tax benefit. Some of the schemes available to save tax under this section are:
* Public Provident Fund (PPF)
* National Savings Certificates (NSC)
* Post Office Scheme (POS)
* Kisan Vikas Patra (KVP)
* Life Insurance Premium
* Equity Linked Saving Schemes (ELSS)
* 5-Year fixed deposits with banks and Post Office
* Tuition fees paid for children's education (maximum 2 children)
Tax benefit on House Rent (HRA)
Please provide all documents pertaining to your rent to your company to calculate HRA and provide you a benefit u/s 10 of Income-tax Act.
Medical insurance
An individual who pays medical insurance premium for self or spouse/dependent children is allowed a deduction of up to Rs 15,000 pa under section 80D. An additional deduction of up to Rs 20,000 pa is allowed for premium payment made for parents. In case the parents are senior citizens, then the maximum deduction allowed is Rs 20,000 per year.
Educational loan
Salaried individuals who plan to pursue higher education should avail of an education loan as the entire interest is eligible for deduction under Section 80E. The loan can be for self, spouse or child from an approved charitable institution or a notified financial institution.
Donations
Subject to the stated limits, donations to specified funds/institutions are eligible for tax benefits under Section 80G.
Home Loan
Interest payments of upto Rs 150,000 per annum are eligible for deduction under Section 24
Jul 18, 2010
The basics of filing income tax
If saving taxes is a cause of concern, filing tax returns is equally a worrying thing for most tax payers! Thanks to the complex system of tax filing with its various forms and exclusions which invariably change every financial year, tax payers are left in a lurch! Here's a simple ready reckoner that takes you through the steps to file tax.
Identifying your income sources
This is the point you should start. Identify the various sources from where you get your income. The monthly salary is the source of income for the employed, while it is the income from business or profession the source for the self employed. Other taxable sources of income include the income that you receive from your house or property on rent or lease, capital gains like income from shares, and income from other sources. You need to have related documents for these various source of income to calculate your tax.
Calculating gross income
The next step is to calculate the gross income. This is done by placing the figures under each of the income heads.
Computing deductions
You must add up all your Section 80C and non-80C deductions of Income Tax Act. There are online and offline help resources available in computing this. For example, if you are paying house rent it is exempted from tax up to a certain limit. Conveyance up to a certain amount is also exempted. Similarly, leave travel allowance is also not taxable but only for a certain number of journeys in certain number of years. Then there are medical allowances, and perquisites that should be reduced up to a certain limit.
Calculating tax payable
Reduce the total deductions from the gross total income to arrive at the actual amount on which the tax is to be paid. The income from house property and capital gains are taxable. Also, tax deducted at source (TDS) if any should be subtracted from your total tax liability.
Finding out tax rate
The final taxable income figures will further differ for a woman, a senior citizen or others.
For individual tax payers, no tax for income below Rs 1.6 lakh
Women tax payers have no tax for income below Rs 1.9 lakh
Senior citizens do not have to pay tax if their income is below Rs 2.40 lakh.
The income tax slabs for A.Y. 2011-12 (F.Y. 2010-11) as per the Finance Ministry website:
Individual Male (Below the Age 65 Years)
Up to 1,60,000 NIL
From 1,60,001 to 5,00,000 10%
From 5,00,001 to 8,00,000 20%
Above Than 8,00,000 30%
Individual Female (Below the Age of 65 Years)
Up to 1,90,000 NIL
From 1,90,001 to 5,00,000 10%
From 5,00,001 to 8,00,000 20%
Above Than 8,00,000 30%
Senior Citizen (Above than 65 years of age)
Up to 2,40,000 NIL
2,40,001 to 5,00,000 10%
5,00,001 to 8,00,000 20%
Above Than 8,00,000 30%
Filing the correct ITR form
This depends on your source of income. ITR-1 is the form to be filled in by individuals having income from salary or pension and income in the form of interest.
ITR-2 is the form should be filled in by persons who in addition to the above list of income sources also receive income from capital gains, income from house or property and income from other sources.
All self-employed individuals making income from business or profession should fill in the ITR-4 form.
Filing tax return
This can be done offline and online. Online payment of taxes can be done through e-filing website, and through internet banking. Offline payment modes can be direct submission of ITR form at the income tax office or through a chartered accountant.
Identifying your income sources
This is the point you should start. Identify the various sources from where you get your income. The monthly salary is the source of income for the employed, while it is the income from business or profession the source for the self employed. Other taxable sources of income include the income that you receive from your house or property on rent or lease, capital gains like income from shares, and income from other sources. You need to have related documents for these various source of income to calculate your tax.
Calculating gross income
The next step is to calculate the gross income. This is done by placing the figures under each of the income heads.
Computing deductions
You must add up all your Section 80C and non-80C deductions of Income Tax Act. There are online and offline help resources available in computing this. For example, if you are paying house rent it is exempted from tax up to a certain limit. Conveyance up to a certain amount is also exempted. Similarly, leave travel allowance is also not taxable but only for a certain number of journeys in certain number of years. Then there are medical allowances, and perquisites that should be reduced up to a certain limit.
Calculating tax payable
Reduce the total deductions from the gross total income to arrive at the actual amount on which the tax is to be paid. The income from house property and capital gains are taxable. Also, tax deducted at source (TDS) if any should be subtracted from your total tax liability.
Finding out tax rate
The final taxable income figures will further differ for a woman, a senior citizen or others.
For individual tax payers, no tax for income below Rs 1.6 lakh
Women tax payers have no tax for income below Rs 1.9 lakh
Senior citizens do not have to pay tax if their income is below Rs 2.40 lakh.
The income tax slabs for A.Y. 2011-12 (F.Y. 2010-11) as per the Finance Ministry website:
Individual Male (Below the Age 65 Years)
Up to 1,60,000 NIL
From 1,60,001 to 5,00,000 10%
From 5,00,001 to 8,00,000 20%
Above Than 8,00,000 30%
Individual Female (Below the Age of 65 Years)
Up to 1,90,000 NIL
From 1,90,001 to 5,00,000 10%
From 5,00,001 to 8,00,000 20%
Above Than 8,00,000 30%
Senior Citizen (Above than 65 years of age)
Up to 2,40,000 NIL
2,40,001 to 5,00,000 10%
5,00,001 to 8,00,000 20%
Above Than 8,00,000 30%
Filing the correct ITR form
This depends on your source of income. ITR-1 is the form to be filled in by individuals having income from salary or pension and income in the form of interest.
ITR-2 is the form should be filled in by persons who in addition to the above list of income sources also receive income from capital gains, income from house or property and income from other sources.
All self-employed individuals making income from business or profession should fill in the ITR-4 form.
Filing tax return
This can be done offline and online. Online payment of taxes can be done through e-filing website, and through internet banking. Offline payment modes can be direct submission of ITR form at the income tax office or through a chartered accountant.
Jul 5, 2010
Investments that aid tax savings.
The best method to reach financial independence is through maximum savings and the least amount of tax payout from your income. The maddening chaos that ensues every year in February for people with regard to deciding upon tax saving instruments and investment products can be reduced with a little bit of research. Remember, investments only for tax saving purposes are not advisable.
Let's look at some investment options in the order of their risk factors, tax savings and returns.
Topics
1. Bank Fixed deposits
2. Public Provident Fund (PPF)
3. National Savings Certificate (NSC)
4. Infrastructure Bonds
5. Life Insurance Schemes
6. Equity Linked Savings Scheme (ELSS)
7. Unit Linked Insurance Plans (ULIPS)
Bank Fixed Deposits
In a fixed deposit saving scheme a certain sum of money is deposited in the bank for a specified time period with a fixed rate of interest (currently between 8% and 10% depending on banks). When you want to invest your hard earned money for a longer period of time and get a regular income, a Fixed Deposit Scheme is ideal. It is safe, liquid and fetches high returns.
Public Provident Fund (PPF)
Given its safety (its government backed) with relatively high returns (currently 8 % p. a. compounded annually) and tax exemptions on its interest earnings and the final corpus; its effective post-tax return currently works out to above 11.57% (for someone paying 30.9% tax). Given its Rs. 500 per year minimum investment stipulation, with one contribution allowed every month, you can even invest small amounts for your long-term. However, the money is locked in for 15 years.
National Savings Certificate (NSC)
The National Savings Certificate — popularly referred to by its acronym NSC — is a post-office savings scheme. Backed by the government, it is one of the safest investment options. The minimum amount is Rs 100, with no upper limit on investment. NSC is for a much shorter duration of 6 years from the date of investment. You get 8% p. a. compounded half-yearly (twice a year). However, NSCs are taxable under the head 'income from other sources'.
Infrastructure Bonds
Through Infrastructure Bonds India or Tax-Saving Bonds an investor can save on taxes as provided under Section 88 of the Income Tax Act, 1961. Though the interest is taxable, you can claim exemption from tax to the tune of Rs. 15,000 under Section 80L. The maximum investment is Rs. 1 L. The lock-in period is of 3 years and the returns work out to 5% - 6% or 8.7% - 11.71% if the tax break is taken into account. This interest is taxable.
Life Insurance Schemes
When buying insurance, keep one thing in mind, look to maximize your cover, not returns. The maximum investment depends on the terms of the policy. The total premium paid has to be within the Rs 70,000 limit of rebate under Section 88. The lock-in period and the returns depend on the scheme and its tenure.
Equity Linked Savings Scheme (ELSS)
ELSS as the name clearly suggests is a savings scheme linked to equity markets. The minimum amount of Rs. 5000 is locked in for three years. Although, ELSS gains are linked to the market performance, it has been seen that they yield healthy returns. From March 31st, 2006 the investment limit in ELSS has been increased to Rs.1, 00,000/- and this entire investment is eligible for deduction under sec 80C of Income tax Act, 1961.
Unit Linked Insurance Plans (ULIPS)
ULIPs basically work like a mutual fund with a life cover thrown in. They invest the premium in market-linked instruments like stocks, corporate bonds and government securities. Investments in ULIPs attract tax benefits under Section 80C. The returns and the lock-in period depend on the plan chosen.
Let's look at some investment options in the order of their risk factors, tax savings and returns.
Topics
1. Bank Fixed deposits
2. Public Provident Fund (PPF)
3. National Savings Certificate (NSC)
4. Infrastructure Bonds
5. Life Insurance Schemes
6. Equity Linked Savings Scheme (ELSS)
7. Unit Linked Insurance Plans (ULIPS)
Bank Fixed Deposits
In a fixed deposit saving scheme a certain sum of money is deposited in the bank for a specified time period with a fixed rate of interest (currently between 8% and 10% depending on banks). When you want to invest your hard earned money for a longer period of time and get a regular income, a Fixed Deposit Scheme is ideal. It is safe, liquid and fetches high returns.
Public Provident Fund (PPF)
Given its safety (its government backed) with relatively high returns (currently 8 % p. a. compounded annually) and tax exemptions on its interest earnings and the final corpus; its effective post-tax return currently works out to above 11.57% (for someone paying 30.9% tax). Given its Rs. 500 per year minimum investment stipulation, with one contribution allowed every month, you can even invest small amounts for your long-term. However, the money is locked in for 15 years.
National Savings Certificate (NSC)
The National Savings Certificate — popularly referred to by its acronym NSC — is a post-office savings scheme. Backed by the government, it is one of the safest investment options. The minimum amount is Rs 100, with no upper limit on investment. NSC is for a much shorter duration of 6 years from the date of investment. You get 8% p. a. compounded half-yearly (twice a year). However, NSCs are taxable under the head 'income from other sources'.
Infrastructure Bonds
Through Infrastructure Bonds India or Tax-Saving Bonds an investor can save on taxes as provided under Section 88 of the Income Tax Act, 1961. Though the interest is taxable, you can claim exemption from tax to the tune of Rs. 15,000 under Section 80L. The maximum investment is Rs. 1 L. The lock-in period is of 3 years and the returns work out to 5% - 6% or 8.7% - 11.71% if the tax break is taken into account. This interest is taxable.
Life Insurance Schemes
When buying insurance, keep one thing in mind, look to maximize your cover, not returns. The maximum investment depends on the terms of the policy. The total premium paid has to be within the Rs 70,000 limit of rebate under Section 88. The lock-in period and the returns depend on the scheme and its tenure.
Equity Linked Savings Scheme (ELSS)
ELSS as the name clearly suggests is a savings scheme linked to equity markets. The minimum amount of Rs. 5000 is locked in for three years. Although, ELSS gains are linked to the market performance, it has been seen that they yield healthy returns. From March 31st, 2006 the investment limit in ELSS has been increased to Rs.1, 00,000/- and this entire investment is eligible for deduction under sec 80C of Income tax Act, 1961.
Unit Linked Insurance Plans (ULIPS)
ULIPs basically work like a mutual fund with a life cover thrown in. They invest the premium in market-linked instruments like stocks, corporate bonds and government securities. Investments in ULIPs attract tax benefits under Section 80C. The returns and the lock-in period depend on the plan chosen.
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