What budget 2011 means for you? – I

February 28th 2011 was the day when finance minister Pranab Mukherjee announced his budget for the financial year 2011-12. Here are some of the propositions announced and their impact on your personal finances.

  • Increase in tax exemption limits by mere Rs 20,000 and : This means you will be saving just Rs 2060 across all the income categories and a mere Rs 1030 for senior citizens.
  • Senior citizen age set at 60 years: This is good for you if your age is between 60-65, as previously the age limit for senior citizen was 65 years.
  • No tax for senior citizens whose income limit is Rs 5 lakhs above 80 years: Excellent news for senior citizens with annual income of Rs 5 lakhs and whose age is more than 80 years, as they don’t have to pay any tax on their income.
  • Insurance products become expensive: FM has increased tax on insurance products that are primarily meant for investment. While originally you paid 1% as tax on insurance premium, now it has gone up to 1.5%. This means you will get lower returns from your insurance products. Also if you have invested in ULIPs, be ready to shell out more. Till date, you paid tax only on the fund management and mortality charges. But now you will also end up paying tax on allocation charges as well as administration charges.
  • Tax benefits on infra bonds to continue: Till now, you could save extra Rs 20,000 in addition to Rs 1 lakh by investing infra bonds. You can continue to enjoy this benefit even further.
  • No need to file tax returns if your salary is up to Rs 5 lakhs: This will bring cheer to plenty of salaried people, whose income lies between Rs 1 lakh to Rs 5 lakh. But if you have income from other sources like dividends, rent, interest etc., you’ll have to inform about the same to your employer. He will then issue you with a Form 16, which the government will regard as IT return.
  • Introduction of Sugam: Sugam is the new form the government plans to introduce in order to simplify the procedure of filing your tax returns. It is being done to promote electronic filing of tax returns along with payment.  

 

This is all about the effect of budget on the direct taxes. Next time we’ll see its effect on indirect taxes.

5 tips for successful tax planning

The season for tax planning is already upon us. 31st March is the deadline by which we all have to file our tax returns. Unfortunately most people wait for the deadline to loom large over their heads before they  start their tax planning. In the process, what they do is they invest in the first available tax saving avenues without looking at the returns generated by those avenues. As a result, while they do save tax, they end up getting poorer. So if you want to enjoy the best of both the worlds, here are some tips you need to follow.

  • Find out your requirements. Are they short-term or long-term? If it is short-term, then your better options are post office savings, ELSS and government bonds. For long term savings, you can opt for insurance policies, PPF tax-saving bank deposits and infrastructure bonds.
  • Are you looking for high returns? Do you have a high risk-taking ability? Then ELSS and ULIPs are your best bet. Otherwise stick to good old PPF, other insurance policies, bank deposits and bonds.
  • Are you looking to make a single payment at a single shot or make frequent payments? In case of the latter, opt for PPF or ELSS, where you can make payments at regular intervals. If not, go for bank deposits, bonds or post office deposits. However when it comes to investing at periodic intervals, ensure you complete the entire investment before the year end in order to avoid paying the tax.
  • Get all the knowledge abou the products you are investing in. E.g. many people think ELSS and ULIPs need to be held only for 3 years. But this is not true as these products are dependent on the markets. So if the markets are high at the time of investing, it may so happen they may have crashed at the end of the holding period. So at that time you may find you have been stting on the loss and so may have to hold on to the investment for a long time.
  • There are other factors that should be considered when deciding on the investment. E.g when selecting ELSS or ULIPs, you need to take into account the past performance and the fund management experience. In case of ULIPs particularly, charges play a determining factor in deciding the selection of ULIPs.

 

Once you can do that, you can get an investment mix offering you high returns.

Continue reading 5 tips for successful tax planning

Tips to save tax for working couples

Rohit and Priya were a working couple. Rohit was an engineer and Priya a manager. This made them a high income couple. They ended up paying a lot of tax. So how could have reduced their tax? What steps should they have taken to lower their tax liability?

If you are in this position, follow these tips to lower your tax liability:

  • Make smart use of investments If you and your spouse fall in different tax brackets, it is important that the one who pays higher tax should claim tax deductions, if the investments are made jointly. This would lower the tax liability. E.g. if you and your spouse have invested in PPF, and you fall in the higher tax bracket, then you should claim the tax deduction.
  • Opt for joint home loans. If you don’t have a home or want to upgrade to the bigger home, apply for a joint home loan. This will let you claim a principal repayment of 1 lakh each and 1.5 lakh each on the interest repayment.
  • Use the benefit of trust. If there are kids involved, form a separate trust for each of them. This will allow them to benefit from the income tax deduction under section 164 of IT Act. They can also create trusts to donate money to their favorite charities, deities etc.
  • Design a HuF to reduce the tax payable on the gifts received during the wedding. Both the partners should take this step.
  • Let the person in the higher tax slab withdraw  money from the investments. This will lower his taxable income.

 

Follow these tips and lower your income tax bill.

Tips to select the right financial advisor

The key to investing successfully is to choose the right financial advisor. A good financial advisor can help save you a lot of money and get better returns with your money. Here are some tips to select the right financial advisor.

  • Trust: You and your financial advisor should have mutual trust. This is very important as different advisors tend to give different recommendations. So it can easily mislead you. It is only when you have mutual trust, that you can manage to get the best returns on our investment.
  • Willingness to serve: Your advisor should be available to you whenever you want. He should have entered into a service agreement with you. This will assure you are in safe hands.
  • Need assessment: The advisor should be able to understand your needs and your risk profile before making any recommendations. If you are a low risk client, and you are advised to invest in risky investments like equities, then you are better off avoiding the advisor.
  • Track record: Get references from your friends and relatives about the performance of your advisor. Talk to the advisor’s clients personally before actually hiring him.

 

These tips are common sense but are essential for your financial health.

Should you opt for Senior Citizen Savings Scheme?

Have your parents invested in Senior Citizen Savings Scheme (SCSS)? Are they planning to invest more in the scheme? Let us see how this scheme has fared and whether you should continue with it.

SCSS is a 5 year scheme, first introduced in 2004. It became very popular as it offered the highest assured return of 9%. You get paid interest each quarter, thus making it beneficial for senior citizens who have no other source of income.

Besides high returns and safety, you also enjoy tax benefit. Investments up to Rs 1 lakh are deductible under section 80C of the Income Tax Act.

But when it comes to renewal, you can only renew the scheme for maximum of 3 years. Also with the entry of direct tax code, there is no guarantee whether the tax benefit will continue.

Moreover these instruments are highly illiquid. It means you are stuck with the investment till the end of tenure. Now if you need cash on an urgent basis, you are stuck. Moreover SCSS is not transferable. So if you want to shift your investment from one bank or post office to another, you will not be able o do it.

Also for those senior citizens who have high investment corpus, SCSS will not offer high returns. In such instances, these investors are better off investing their funds in slightly riskier options like monthly income plans or balanced funds.

How will the direct tax code affect you?

The government wants to introduce changes in the existing tax regime. It is going to change the way you invest, save tax as well as your overall tax structure. Let us see how with this example.

Ravi earns an annual salary of Rs. 10 lakhs. He invests Rs. 50,000 in PPF, Rs. 30,000 in tax-saving mutual funds and Rs. 20,000 in insurance. He has a home loan of which he has already paid Rs. 2 lakhs in interest along with the principal outstanding of Rs. 1 lakh. Let us see how his tax liability will change.

Ravi’s present tax paid: Ravi invests in mutual funds, insurance PPF and home loan principal. The amounts invested in these options are tax exempted under section 80C up to Rs. 1 lakh. So Ravi’s taxable income goes down to Rs. 9 lakh. He has also paid Rs 2 lakhs towards the interest on his home loan. Hence his total taxable amount goes down to Rs. 7 lakhs. Now out of this, Rs. 1.5 lakhs don’t attract any tax, so his taxable income further reduces to Rs. 5.5 lakhs. Of this, he pays 10% tax on amounts up to Rs. 3 lakhs and 20% tax on amounts up to Rs. 5 lakhs. So the total tax, he pays is 10% of Rs. 3 lakhs and 20% on Rs. 2.5 lakhs  =  Rs. 80,000.

Now when the new tax code comes into effect, his total tax exempted income becomes Rs. 1 lakh (contributions towards PPF + insurance + mutual funds) + Rs. 1 lakh towards home loan principal repayment. Hence his total taxable income now becomes Rs. 7 lakhs. Of this, there is no tax on his income up to Rs. 1.6 lakhs. Hence his total taxable income now becomes Rs. 5.4 lakhs. On this he pays only 10% tax. Hence the total tax he will pay is Rs. 54,000.

Hence with the new tax code, he ends up saving Rs. 26,000.

How to choose the tax-savings options to get the best returns?

In the last article on best tax-savings options, we saw the best the options available to you to save tax. Now let us see how to make the best use of them.

First make the best possible use of PPF. You can invest up to Rs. 70,000 in a PPF account in a year. So try to invest as much as possible in PPF.

Next calculate your insurance needs and find out if you are adequately covered or not. If not, then opt for a life insurance policy. Take a simple term plan as you can get high life cover at low cost.

Once you have done this, now is the time to take a look at your investments. Are you a risk taker? Then invest the balance portion of the investment amount in ELSS. If not, then you can opt for bank FDs and NSCs.

E.g. if your taxable amount is Rs 1,00,00,00, then invest Rs. 70,000 in PPF.

This leaves you with an amount of Rs. 30,000. If you have selected an insurance policy with a premium of Rs 10,000, then Rs. 10,000 will be deducted from Rs. 30,000. This leaves you with Rs. 20,000 that you can invest either in ELSS or NSC and bank FDs.

This will ensure you get the best possible returns from your investment.

Best Tax Savings Options

We are already in the month of February and very soon March will be upon us. So it is time to think about taxes and how to save them. But which are the best tax savings options available? Here we give you a list of some of the best tax savings options open for you.

  • ELSS: Are you ready to take risks in order to earn high returns? If your answer is yes, then this is the best option. ELSS or equity linked savings schemes are mutual funds with a lock-in period of 3 years and they invest in equities. Here you not only save tax but also get capital growth.
  • PPF: It is one of the best debt products available in the market. It is backed by Government of India and has a lock-in period of 15 years. You get 8% interest on the amount deposited and both interest as well as capital withdrawal are tax-free. However you cannot invest more than Rs 70,000 in any one financial year.
  • Medical insurance: You can get a deduction of Rs 15,000 if you are paying a medical insurance premium for you and your dependants. But if your dependents are your parents, you get further deduction of up to Rs 15,000. If you are senior citizen, your deduction amount goes up to Rs. 20,000.
  • Home loan principal: The principal portion of your EMI will also help you save tax.
  • Life insurance: This investment will not only save you tax but will also give you a peace of mind should you die or are unable to work. Opt for a simple term plan that will give you higher life cover at low premium.

The Best Tax-Saving Investment Options

We all wait till March before starting with our tax-planning. As a result, we rush through our investments before the financial year is over. In the process, we end up making poor investment choices that do save tax but do not offer attractive returns. Hence it is advisable to start our tax-planning way in advance.

Once you have decided to begin with your tax-planning, you must know where to invest to get the best possible returns. Here are some best investments.

ELSS: Nothing beats the returns from equity-linked savings schemes (ELSS), if you can handle the risk. There are many ELSS funds that have managed to give superlative returns. Choose funds with a track record of at least 5 years. The main advantage of ELSS is that it has only 3 years lock-in period, which is the least.

Insurance: Besides protecting you against unforeseen events, insurance also helps you save tax. But don’t buy insurance simply to save tax. Instead calculate how much insurance you actually need and find out if you have a shortfall. Only then, buy the insurance. If possible, opt for term plan, as it is the cheapest policy offering you highest possible life cover.

PPF: One of the oldest and the best debt products, PPF is totally exempted from tax. The sum invested, the interest earned and the maturity amount are all tax-free. However the maximum amount you can invest is only Rs. 70,000 in one financial year.

Home loan: The principal portion of your EMI for the home loan can help you in reducing your tax liability.

Premium towards medical insurance: Now you can get a deduction of up to Rs 15,000 towards the medical premium paid. This insurance could be for you or your dependants (spouse and children). If you are paying premiums for your parents, you can get further deduction of up to Rs. 15,000 ( up to Rs. 20,000 in case of senior citizens).

The way to do the tax planning smartly, is to contribute the maximum amount towards your PPF. Then invest the rest as per your financial needs. E.g. if you don’t have adequate insurance cover, first buy insurance before considering other investment options.

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