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.

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.

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.
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