The Tribune, Chandigarh, India

Investments for saving tax
Anil Chopra

Have you already planned your investments for tax saving in the current financial year? If not, it is not too late. Tax planning is the basic duty of every citizen and an integral part of one's financial planning exercise which should be undertaken carefully by investing in the right instruments at the right time of the year.

The two most important sections of the Income Tax Act are Section 80C and Section 80D. Under the former, the maximum limit to invest is Rs 1 lakh, i.e., it gives you a chance to reduce your taxable income by Rs 1 lakh by investing in various instruments like ELSS, provident fund, National Savings Certificate (NSC), 5-year bank deposits, life insurance plans like ULIPs, term plans, pension plans, etc. Besides this, the payment towards the principal amount of your home loan is also eligible for deduction under this section. All this can be better utilised, and the gains maximised, if one aligns his investments to various goals that one has, depending upon the risk-taking capacity and the life stage. For young people, there are different solutions that vary from those which are there for people above 50 years of age, or perhaps who are about to retire.

Equity-linked Savings Scheme

Equity-linked Savings Scheme (ELSS) is one of the most popular investments under Section 80C, wherein investors enjoy both — the benefits of capital appreciation, as well as tax benefits. These are diversified equity mutual fund schemes with a lock-in period of three years. We suggest investing in these schemes for a longer period of time, say 7-15 years, as it would lead to wealth creation. It is important to note that investments in ELSS are subject to market risks, as a majority of corpus from these schemes is invested in equities.

Contribution to PF/PPF

Your contribution towards PF is also covered under Section 80C. Employees Provident Fund (EPF), which is meant for salaried people, is deducted directly from one's salary by the employer. Self-employed professionals can open a Public Provident Fund (PPF) account with a nationalised bank or a post office, where the maximum limit is Rs 1 lakh these days. Some people exhaust the entire limit by investing Rs 1 lakh entirely in PPF account. However, this is not advisable as investing in PPF only helps in creating a corpus for retirement, and does not lead to wealth creation, because its interest rate is only equivalent to the inflation rate.

Health insurance

Investors who have already done their investments under Section 80C, but still want to save some more tax, can go for 80D, by taking a suitable health insurance plan, depending upon their age bracket. The plan can even cover your dependent parents and children. A deduction of Rs 40,000 can be claimed under this in respect of premium paid by any mode other than cash towards health insurance policy of various general insurance companies. Since health insurance is a basic necessity of every individual, it is extremely important to get yourself adequately covered, and even your family members.

Rajiv Gandhi Equity Savings Scheme

If your gross total income is up to Rs 12 lakh, you can start investing in specified stocks under the Rajiv Gandhi Equity Savings Scheme. This can get you a tax break under Section 80CCG. Under this, you get a deduction of 50% on investments up to Rs 50,000, so the maximum break you get is Rs 25,000.

Now, the most important question where people get stuck is how to split Rs 1 lakh between provident fund, ELSS and insurance plans, in order to receive both the benefits — save tax, and also earn good returns at the same time. People in the younger age group should divide it almost equally among the three options. For example, Rs 30,000- 35,000 in provident fund, Rs 30,000-35,000 in ELSS, and the remaining can be put into a variety of insurance plans. However, for people above 40 or 50 years of age, it becomes too late to buy a fresh insurance plan. Therefore, they should put half of their money in ELSS, and the other half in provident fund.

Compare different tax-saving schemes

It is important to compare the advantages of different tax-saving schemes, and then, depending upon your age, social liabilities, tax slab and personal preferences, decide on the appropriate mix of investments/insurance plans, which shall reduce your tax liability to zero or to the “minimum” possible. Do consult your financial planner for the same.

The author is Group CEO, Bajaj Capital. The views expressed in this article are his own

MIPs — A smart way to help generate income
Chirag Rathod

Historically, life insurance in India has been taken through traditional life insurance products such as endowment and money-back plans. After the liberalisation of insurance sector, unit-linked insurance plans (Ulips) took the centre stage and became the fancy of the market and customers. Customers were thrilled by the bull run in equity markets and were excited to see exponential returns in their policies until the global financial crisis hit in 2008.

Faced with significant volatility in equity markets, customers shifted their demand back to alternate plans which provide some guarantees to returns. Due to an increase in customers’ demand for traditional products, which can provide smoother returns, insurers started introducing variations of endowment and money-back plans.

Several independent research pieces have been conducted, which reveal that while planning for the long term, many customers are averse to taking risks and instead prefer guaranteed returns. Hence, they tend to prefer traditional products over Ulips. A customer research conducted by Canara HSBC Oriental Bank of Commerce Life Insurance Co. Ltd. along with a research organisation reveals that a significant percentage of customers prefer a regular income over a lump sum payout to achieve life stage goals. Hence, the prevalence of guaranteed Monthly Income Plans (MIPs) in the market.

MIPs are typically for customers who either wish to have supplementary income along with their regular source of income and/or who are looking for a regular income source to support their retirement needs. There are various types of MIPs in the market today and so it is important to consider which is right for you.

How do MIPs of insurance companies work

Typically, MIPs offer payouts at regular intervals on a monthly basis (although some companies offer annual payout as well) for a period ranging from 10 to 15 years.

Another important feature is that life cover is available in MIPs during the premium payment term and additionally some plans offer life cover during the income receipt period as well. Life cover in MIPs is a unique advantage over simple wealth accumulation products like fixed or recurring deposits which offer no such benefit in the event of death. This offers peace of mind — loved ones are safeguarded in the event of untimely death. As life cover can vary from plan to plan, it is important to check that the protection is right for you. If protection is very important for you, you may wish to opt for a MIP which covers you not only during premium payment but also during income receipt period. Further, you may wish to opt for a plan that does not deduct monthly incomes already paid from the death benefits payable to the nominee, so that life cover is not reduced.

Is it suitable for me to buy an MIP from an insurance company?

If your goal is to build up a lump sum for a defined need say, buying a house or children’s marriage, then an endowment plan which pays out a lump sum, may be more suitable option. However, if you are looking for an additional income, besides your regular income, to support your lifestyle or your dependents’ needs (e.g. child’s needs of additional support during their hostel life or support your parents on an ongoing basis), then a MIP is more suitable. Another important factor to consider is the duration of your goal. If you are looking for an income payout for life, an annuity plan would be more suitable since payouts continue throughout life. However, if you are looking for a regular income for say, 10-15 years, a MIP would be more suitable.

What should I do after buying an MIP?

You must keep yourself updated on the progress of the plan purchased, to see that it remains on track to fulfil your desired life goals. It is also important to ensure that you pay all premiums in your policy to maximise the value of the plan. Stopping paying premiums or surrendering the plan early may impact policy benefits severely. To conclude, MIPs can provide a great means of achieving a tax-efficient supplementary income with in-built life cover to protect your life goals.

The author is Appointed Actuary and Director, Products and Strategy, Canara HSBC Oriental Bank of Commerce Life Insurance. The views expressed in this article are his own

tax advice
Interest income up to Rs 10,000 exempted
SC Vasudeva

I am a Central Government pensioner, aged 72 years. Please clarify the following points:

a) My total interest income (simple interest in post office and other bank accounts) will be ~42,000 during the FY 2013-14. Will I be entitled for exemption of Rs 10,000 from this income. Also clarify if Rs 32,000 will be considered as an interest income or the whole amount of Rs 42,000?

b) Secondly, is there any provision in the Income-tax Act for exemption of certain amount in the form of a gift amount or some other way for supporting an adult son or a daughter who is fully dependant on him with more than 50% physical or mental disability? —Baldev Raj

A deduction in respect of interest on deposits in a savings account is allowable in computing the total income to the extent of Rs 10,000 provided such deposit account is with

i) A banking company to which the Banking Regulation Act, 1949, applies;

ii) A co-operative society carrying on business of banking; or

iii) A post office.

Therefore, in case the interest income of Rs 42,000 includes interest on savings bank account from either of the above three institutions, interest income to the extent of Rs 32,000 would be taxable.

a) No deduction is allowable from the total income of an individual in respect of the gift made to an adult son or daughter who is fully dependant on father due to physical or mental disability. However, any gift made to a son or a daughter is neither taxable in the hands of the donor nor in the hands of the donee. It may be added that a deduction from total income is allowable to an individual and HUF in respect of expenditure incurred for medical treatment, including nursing of a dependant who is a person with a disability. Such deduction is limited to the extent of Rs 50,000 where a dependant is suffering from a disability. In case of a severe disability, such deduction is allowable to the extent of Rs 1,00,000.

I am a senior citizen. Kindly work out my tax liability for the financial year 2013-14. My details are as under:

i) Annual pension Rs 3.20 lakh

ii) Interest income from FDRs, etc. Rs 0.80 lakh

iii) Contribution to PPF for rebate u/s 80C Rs 1 lakh

— PDS Sharma

You would be liable to pay a tax of Rs 5,150 on total income of Rs 3,00,000 (Rs 3.20 lakh + Rs 0.80 lakh – Rs 1 lakh). This reply is based on the presumption that interest income does not include interest earned on savings bank account with a bank or a post office. In case the amount of Rs 80,000 includes such an interest, a further deduction to the extent of Rs 10,000 would be allowable and in such a case tax liability on Rs 2,90,000 would be Rs 4,120.