Tax Savings Investments

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Income Tax is payable by every citizen of India when his/her annual income exceeds the prescribed limit.

 

However one can reduce the tax liability through tax planning. Tax planning envisages arranging the financial income & investment in such a way so as to enjoy the maximum tax benefits.

 

Maximum tax benefits can be availed by investing his / her savings in notified Savings scheme.

 

Currently investments in the following qualify for tax deduction Under Section 88.

 

Section 88 Provides:

 

SHORT TERM – Duration 3 years.

 

Infrastructure Bonds – ICICI Bank, IDBI, Rural Electrification Corporation (REC)

 

Annual Interest is taxable

 

MEDIUM TERM – Duration 5 /6 years.

 

National Savings Certificate (NSC) - Duration 6 years

 

Single Premium Life Insurance – LIC Bima Nivesh / SBI Sukh Jeevan – Duration 5 years.

 

LONG TERM – Duration – 10 years

 

Public Provident Fund (PPF) – Duration 15 years.

 

Life Insurance – Duration 10 – 25 years.

 

Maturity amount from PPF & Life Insurance are 100% Tax Free.

 

TAX FREE RETURNS:

 

Investment where the returns are 100% Tax free.

 

The effective rate of return is higher when one reckons with the Income Tax. The best investment options are:

 

8% TAX FREE GOVT. SAVING BONDS

 

* Duration 5 years * Maximum Rs.2 lakhs per person * Interest option Half yearly / cumulative * Cumulative Rs.10,000 becomes Rs.15,110.

 

Pre Tax Yield 11.67%

 

Account can be opened in the name of Minor.

 

NRS’s can also invest.

 

VRS/ Retirees can invest the retirement terminal benefits within 3 months.

 

No tax Deduction at source.

 

7% TAX FREE GOVT. SAVING BONDS.

 

* Duration 6 years * Interest option Half yearly / cumulative*Cumulative Rs.10,000 becomes Rs.14,802.50

 

Pre Tax yield 10.21%

 

Interest option Half yearly / cumulative

 

NO INVESTMENT CEILING

 

Account can be opened in the name of Minor.

 

No Tax deduction at source

 

PUBLIC PROVIDENT FUND

 

Yield 9% (Floating Rate) compounded Tax Free

 

Duration 15 years

 

Min Rs.500 p.a. Max Rs.70,000 p.a. – It is the most flexible scheme.

 

12 investments per year can be made investment Deductible u/s 88

 

No tax deduction at source

 

Partial withdrawal facility from 7th year No Court attachment. Only Income Tax authorities can attach it for Tax dues.

 

A/c can be opened in minor’s name. Clubbing of income under Section 64 is avoided.

 

(Ideal for meeting child’s Educational / Marriage requirement)

 

The combined investment of the Parent & Minor cannot exceed Rs.70,000.

 

Renewable in blocks of 5 years.

 

Excellent investment for retirement planning.

 

Open for NRI’s also.

 

TAXABLE INVESTMENTS

 

POST OFFICE MONTHLY INCOME SCHEME

 

One of the few schemes still offering highest fixed returns is the post office Monthly Scheme (PO MIS)

 

9% monthly interest.

 

10% bonus payable on maturity.

 

Effective yield 10.67%

 

Duration : 6 years * Minimum Rs.6000 * Maximum Rs.3 lakhs in single a/c & Rs.6 lakhs in joint a/c. * No Tax deduction at source.

 

Premature closure: > 1 year – 5% discount > 3 years - No discount.

 

Ideal investment for retirees.

 

COMPOUNDING:

 

The combination of time & money is powerful.

 

Compound interest, which is interest on interest, has a dramatic effect on the investment.

 

It is advisable to have some investment under the cumulative interest options as it earns a highest yield.

 

About 475 years ago, Dutch settler Paul Minuit Bought Manhattan Island from the Native Americans for a handful of trinkets worth about $25. Had they then invested those $25 at just 5 per cent interest, their holdings would today be worth: $6 Trillion!!!

 

Some of the safe cumulative instruments are:

 

KISAN VIKAS PATRA / KVP

 

9% interest p.a. compounded payable at maturity.

 

Duration: Money doubles in 7 years 8 months.

 

No tax deduction at source.

 

There is no limit on maximum investment

 

Premature encashment facility after 2 years 6 months.

 

NATIONAL SAVINGS CERTIFICATE (NSC)

 

9% p.a. compounded payable at maturity

 

Duration: 6 years

 

No tax deduction at source

 

Cumulative Rs.10,000 becomes Rs.16,959

 

Tax rebate u/s 88 interest exempt u/s 801. Foreclosure is not possible. It can be pledged as security with bank for loan purpose.

 

MEDICLAIM POLICY

 

With the increasing age, the medical cost keeps on rising. The cost of hospitalization is very prohibitive.

 

It is imperative to take out a Medical insurance policy.

 

Premium paid upto Rs.10,000 p.a. is deductible from the Gross total income under Section 80D.

 

In order to make a claim, the person should have been hospitalized for a minimum 24 hours.

 

The Policy covers: Room, Boarding expenses, Nursing expenses, Surgeon, Anesthetist, Specialist Fees, Blood, Operation Theatre charges, Medicines & Drugs, Diagnostic expenses.

 

Certain pre-existing diseases & other ailments are excluded.

 

In case of no claim in a year 5% bonus is added to the Policy amount. 10% Family discount is offered in premium.

 

CLAIM:

 

Earlier payment had to be made to the hospital & then a claim had to be made with the Insurance Company.

 

This is not required now as with photo identify the person can get treated at a predetermined hospital.

 

PENSION PLAN: Section 80CCC provides for deduction upto Rs.10,000 premium from Gross Total income under the Pension Plan. The investor can choose the duration of the Policy & at what age he wants the monthly pension to start. On maturity he has an option to withdraw upto 25% of the amount accrued. The pension is payable till death.

 

INFLATION ERODES YOUR SAVINGS: Inflation can make the prices of things you buy cost a little more every year.

 

Items

1987(Rs.)

1997 (Rs.)

2017 (Rs.)

Colgate toothpaste

8.05

18.9

104

Hamam Soap

3.05

7.85

52

Masala Dosa

3.5

14

224

Petrol

7.99

25.48

259.12

L G Cylinder

56.15

137.85

830.85

Zodiac men’s shirt

225

510

2620.27

 

 

Chart indicating what some of the items will cost in the future.

 

Your income should rise annually to combat the inevitable inflation.

 

It is like having a slow leak in your tyre – you might not notice it on a daily basis, but you can’t afford to ignore it for long. For retirement investors, staying ahead of inflation is an important goal.

 

It is like keeping your head above water!

 

POINTS TO PONDER:

 

1. Make investments in Joint Names as it will ensure continuity in case of untimely death

 

2. Make Nomination for investment where such facility are available.

 

3. Keep copies of the application for further reference.

 

4. Review your investments portfolio atleast once a year.

 

5. Record all maturity dates for further follow up.

 

6. Make a Will

 

FINANCIAL HABITS TO CREATE WEALTH:

 

From the book The Millionaire NextDoor.

 

Millionaires set specific financial goals

 

They are frugal

 

SAVES & INVESTS 10% - 25% of income.

 

95% of them own shares.

 

Invest in Bonds, Real Estate, and own business

 

Invest to lower their taxes.

 

Seek advice of qualified professionals

 

FOR any further clarification, please feel free to contact Kiran Boal (Chartered Accountant) Director Boal Financial Services Pvt Ltd, Boal Centre, 3rd Floor, 2nd Cross, Gandhinagar, Bangalore 560 009 , Phones: 2264742 / 2203392.

 

Email: prosperity@rediffmail.com

 

Issue BG23 Feb03

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