IAPM project

A

PROJECT ON

TAX RELIEF ON VARIOUS FINANCIAL INSTRUMENTS AND REAL ESTATE

Submitted towards the partial fulfillment of

4TH Semester of MBA- INSURANCE

Degree course, for the subject

INVESTMENT ANALYSIS AND PORTFOLIO MANAGEMENT

Submitted by: Submitted to:

NIHARIKA SHARMA MS.RUCHI BHANDARI

Roll No. 228

M.B.A. INSURANCE(Sem. IV)

INTRODUCTION:

Tax planning is an essential part of financial planning. Efficient tax planning enables to reduce tax liability to the minimum. This is done by legitimately taking advantage of all tax exemptions, deductions rebate and allowances while ensuring that investments are in line with long term goals.

Financial Instruments for Tax Saving

Tax saving as per Section 80(C)

Section 80C provides a list of instruments, which you can invest in for saving tax. One can invest a maximum of Rs 1 lakh in all the following instruments put together so that the entire amount of Rs 1 lakh shall be deducted from the taxable income. Deduction is received for the following investments-

1. Any life insurance policy or unit-linked insurance plan (ULIP). Lock-in period for ULIPs is 3 to 5 years and the returns vary according to the performance of fund. But if the annual premium exceeds 20% of the sum assured on your policy, then tax benefit will not be received.

2. Any retirement benefit plan which is offered by mutual funds. Examples are Templeton India Pension Plan and UTI Retirement Benefit Plan

3. A Provident Fund, which is covered under the Provident Fund Act. This means investments made through salary deduction in the Employees Provident Fund (EPF) account as also investments directly in the Public Provident Fund (PPF). One can invest up to Rs 70,000 in PPF. Current rate of return on EPF is 8.5% & that on PPF is 8 %

4. Approved superannuation fund. In this the employer, on behalf of employee, does deducts the investment amount from employee’s salary.

5. The National Savings Certificates (NSCs). 6. The Equity Linked Savings Scheme (ELSS) that are offered by mutual funds. 7. Certain Pension policies provided by insurance companies where the benefits were

earlier available u/s 80CCC. Earlier, a limit of Rs 10,000 was present on such investments; however now that ceiling has been removed.

8. Bank fixed deposits which provide the Section 80C tax benefit. They have a lock-in period of 5 years.

9. Apart from above investments, one can also get a deduction on certain expenses like the principal repayment on home loan and tuition fees paid for childrens education.

BANK SAVINGS

1. Bank Fixed Deposits[Term Deposit]Under a Fixed Deposit Saving Scheme a certain amount of money is deposited in the bank for a given time period with fixed rate of interest. Fixed Deposit Scheme is ideal when one wants to invest money for a longer period of time and get a regular income. It is also safe, liquid and gives high returns. Loan / Overdraft facility is available against bank fixed deposits. Now many banks don’t charges for premature withdrawal.

2. Recurring DepositsIn a Recurring Bank Deposit Savings Scheme, the investor invests a certain amount in a bank on a monthly basis for a fixed rate of return. There is a fixed tenure, at the end of which the principal sum as well as the interest earned in that period is given to the investor Recurring Deposits provide an element of compulsion to save at higher rates of interest applicable to Term Deposits along with liquidity to access savings at any time.

GOVERNMENT TAX SAVINGS

RBI Bonds/RBI Relief BondsRBI Bonds have a special provision that allows the investor to save tax. These Bonds are issued by the RBI. The interest is compounded on half-yearly basis. The maturity period of RBI Bonds is 5 years, and the interest received is tax-free in the hands of investor.

POST OFFICE SAVINGS

1. Post Office Time Deposits 2. Post Office Recurring Deposits 3. Post Office Monthly Income Scheme [Post office MIS] 4. National Savings Certificates [NSC] 5. National Savings Scheme [NSS] 6. KisanVikasPatra [KVP] 7. Public Provident Funds [PPF]

OTHER SAVINGS

1. Infrastructure Bonds:Infrastructure bonds are available from ICICI and IDBI in the name of ICICI Safety Bonds & IDBI Flexibonds. They provide tax-saving benefits for the investor under Section 88 of the Income Tax Act, 1961; one can reduce their tax liability up to Rs 16,000 p.a.

2. Company Fixed Deposits:Company Fixed Deposits are fixed deposits in companies that earn a fixed rate of return over a period of time. Financial institutions as well as Non-Banking Finance Companies (NBFCs) also accept such kind of deposits

TAX RELIEF ON VARIOUS FINANCIAL INSTRUMENTS:

1. EQUITY2. DEBENTURES3. BONDS4. MUTUAL FUNDS5. INSURANCE6. PPF7. MIS8. GOLD(RAW)9. FD

Options in tax-saving investments

PPF fits all portfolios, except those earning basic pay of over Rs 8.3 lakh yearly. It is that time of the year when your employer will ask for your investment declarations. Most salaried persons will want to invest in tax saving instruments. Among instruments you cannot do without, is Public Provident Fund (PPF) which offers tax-free eight per cent annual returns with no risk, making it a good fit in most portfolios. However, a person can invest maximum of Rs 70,000 each year in PPF.

For people in higher income brackets (basic salary of over Rs 8.3 lakh), the employee provident fund (EPF) itself covers the permissible limit of savings, thus investment in other instruments is

not necessary. Other than EPF and PPF, a person needs to look at risk-return parameters of each product that helps him or her save tax.

SECTION 80C

Equity Linked Savings Scheme (ELSS): This product can help people in all tax brackets to save taxes while giving inflation-adjusted returns. The investor does not need to pay any tax on withdrawal too. ELSS has a lock-in period of three years, the shortest among all tax-saving instruments.

Unit-linked insurance plans (Ulips): These products too can provide inflation-adjusted returns and opportunity to create wealth in the long term, as they invest in equities and debt papers. However, you need to keep investing regularly and wait until the maturity, as high upfront charges eat into returns of the older products (issued before Sept. 1, 2010). Even after the recent regulatory changes in Ulips, they are still expensive investment vehicle compared to mutual funds.

Other insurance plans: Covering risks is essential for your goals. Buy insurance for actual requirement rather than for saving taxes. That's why opt for a term plan, as oppose to endowment and money back, as the former offers highest risk cover for low premiums. The premiums paid are eligible for deduction under Section 80C.

New Pension Scheme (NPS): This is the most recent entrant to the Section 80C instruments. It can be a good option for retirement planning with tax savings. The drawback is that the amount is taxable on withdrawal on maturity.

Pension Plans: Contribution in pension plans is allowed as deduction under Section 80CCC. Pension plans can be traditional or unit-linked, or from mutual fund houses.

Other products that are covered under Section 80C are national savings certificate, senior citizen savings scheme, 5-year fixed deposits, including accrued interest, tuition fee for two children for full time courses, home loan principal repayment. The combined limit of deductions under Section 80C, 80CCC and 80CCD is Rs 1 lakh.

OTHER INSTRUMENTS

Interest on home loans: Interest on home loan is deductible up to Rs 1.5 lakh each year for loans taken after April 1, 1999 under Section 24(i)(vi). If it is a joint loan, both the people can avail of this deduction simultaneously depending on their contribution.

Infrastructure Bonds: By investing in these bonds you can avail additional deduction of Rs 20,000 from your income under section 80CCF. The interest earned on these is taxable, which will eat into your returns.

Health Insurance: The premiums paid for health insurance of self, spouse and dependent children are deductible from your income up to Rs 15,000 under Section 80D. If you pay premiums for your parents, you can claim a deduction of additional Rs 15,000 or Rs 20,000 if they are over 65.

A person can also claim additional deduction on interest component of an educational loan taken for spouse, children or self under Section 80E. For people interested in philanthropy,

Section 80G provides for deduction of 50 per cent or 100 per cent of the amount donated.

Tax Saving Schemes

The table that follows lists out tax saving schemes that entitle you to a reduction on your taxable income. What this means is that if you have a taxable salary of Rs. 9,00,000 and invest Rs. 1,00,000 in any of these tax saving schemes then your taxable salary gets reduced by 1,00,000, and you pay tax as if you only earned Rs. 8,00,000 in the year. The maximum investment column in this table indicates that the tax benefit ceases to exist for an amount in excess of what’s indicated there. So, if you invest more than 70,000 in PPF – you will still be entitled to tax benefit on only Rs. 70,000. Also, note that the combination of these options will give you a maximum tax benefit of Rs. 1,00,000, so if you have already bought insurance worth Rs. 1,00,000 investing another Rs. 1,00,000 for ELSS will not get you additional tax saving. The only exception to this is the 80CCF Infrastructure Bonds, which reduce your taxable income by Rs. 20,000 over and above the Rs. 1,00,000 saved by the other options.

S.No. Name Maximum Investment Notes

1 Life Insurance Premium Paid 1,00,000 Policy should either be in your name, spouse’s name or children’s name

2 Contribution to Public Provident Fund

70,000 You can’t add the employer’s contribution to PF under this head.

3 Investment in NSC (National Savings Certificate)

1,00,000 Post office scheme with guaranteed returns.

4 Contribution to ULIPs 1,00,000 Do your due diligence before getting into these.

5 Contribution to ELSS Mutual Funds

1,00,000

6 Contribution made to notified pension funds

1,00,000 UTI Pension fund is one example of this

7 Amount spent on children’s education

1,00,000 For tuition fee only, and a maximum of 2 children

8 Annual Repayment of Housing Loan

1,00,000 There are a lot of conditions in this that I’m not fully familiar with, so you need to consult an expert before banking on this.

9 Tax Saving Fixed Deposits 1,00,000 Term of 5 years

10 Premium Paid Towards JeevanSuraksha

1,00,000 Pension plan with annuity for life.

11 Section 80CCF Infrastructure Bonds

20,000 This is over and above the 1,00,000 mentioned above

http://www.onemint.com/2011/01/05/section-80c-tax-saving-schemes/

MUTUAL FUNDS:

Throughout the year, the mutual fund will buy and sell securities in an effort to increase the value of the fund and generate capital gains as a result. To avoid paying tax, mutual funds generally pass along almost all of their capital gains to their shareholders once a year.

How are Mutual Funds Taxed?

Distributed short-term capital gains are taxed as ordinary income and distributed dividends and long-term capital gains are taxed as long-term capital gains. When you sell shares of a mutual fund for a higher price than you paid, you pay either a short- or long-term capital gain tax, depending on how long you own the shares.

For example, if you receive a capital gain distribution and then incur a short-term capital loss on a sale of mutual fund shares you held six months or less, the IRS has a special “Short-Term Capital Loss” rule that applies.

The IRS has created several rules in order to discourage loss-oriented selling, such as the wash sale rule. According to this rule, if you purchase shares of a mutual fund (including reinvested dividends) within 30 days before or after you redeemed shares of the same mutual fund for a loss, the redemption is considered a "wash sale" and some or all of your capital loss will be deferred. The amount of your deferred loss increases the cost basis of the shares purchased within the 30-day window.

Mutual Fund Dividends

Tax reports such as Form 1099-DIV (Dividends and Distributions) from mutual fund companies usually specify the amount of total ordinary dividends (including dividends, interest and short-term gains) and total long-term capital gains. Due to provisions of the Jobs and Growth Tax Relief Reconciliation Act of 2003, if a mutual fund receives qualifying dividends from a stock that it holds and passes these onto its shareholders, recipients will be able to apply new, lower tax rates to those dividends. Therefore, mutual fund companies should also report separately the dividends that qualify for the lower rates. This makes reporting capital gain amounts on the appropriate IRS Form 1040 return or Schedule D much easier.

http://www.tradelogsoftware.com/tax-topics/mutual-funds/

Minimizing capital gains tax

If you switch from dividend option to growth in a mutual fund during the year, it could attract tax. Many retail investors are looking to take advantage of the soaring indices by selling their stocks and mutual funds (MFs). Besides booking profits, they can adjust such profits against any loss-making investments, thereby minimizing the tax on capital gain.

Investors need to keep a few details in mind. Any Long-Term Capital Gain (LTCG) arising out of sale affected on or after October 1, 2004, on shares and equity-oriented MFs is exempt from tax. This provided, the transaction was on a recognized stock exchange in India and the investor has borne the Securities Transaction Tax (STT) on the sale.

CAPITAL GAINS & LOSSES

The Income Tax Act says capital losses can only be set off against capital gains — other incomes like salary or business income cannot be used. Long- Term Capital Loss (LTCL) can only be set off against taxable LTCG. However, Short-Term Capital Loss (STCL) can be set off against both Short-Term Capital Gain (STCG) and taxable LTCG.

STT is not required to be paid on the following transactions taken place on or after october 1, 2004:

Asset other than equities and equity-based MF schemes Sale of equity shares which has not taken place on a recognised stock exchange in India. Redemptions, share buy-backs by the companies.

On such assets, LTCG will be taxed at 10 per cent without indexation or at 20 per cent with indexation, whichever is lower. STCG is considered as normal income of the assessee, added to the income and taxed at the slab rate applicable.

SET-OFF ISSUES

Both LTCG and LTCL are tax-free. So any LTCL incurred from October 1, 2004, arising out of sale of equity shares or equity MFs cannot be set off against any LTCG, even the one arising out of, say, housing property. But it is possible to save tax on LTCGs by using Sec 54EC, 54F, 54 and carrying forward the losses.

Take the case of an individual who has earned taxable LTCG and has invested the gains immediately thereafter in infrastructure bonds, to bring his capital gains tax to nil. The question

arises, if during the same financial year, he incurs a LTCL, can he offset the loss against the gains, in spite of having invested in the bonds under section 54EC? Also, can he carry forward the loss?

The answers to these questions lie in the fact that sections 54/54EC/54F are exemptions and not deductions. In other words, if an income is eligible for exemption, it is not to be included in the computation of income. On the other hand, deductions (Secs. 80C, 80G, 80D, 80U) are to be claimed after having aggregated the incomes from different sources.

After having claimed the exemption under section 54/54EC/54F, an income ceases to be taxable. As such, the full amount of capital loss can be carried forward. So, if the assessee earns LTCG later in the same financial year, he can invest in bonds within six months, claim exemption under section 54EC and carry forward the loss.

SWITCHING OPTIONS

If an investor is contemplating a switch from dividend to growth or vice versa within a MF, he could attract capital gains tax liability. One should take care to see that the investment has been done over a year. In that case, LTCG would be exempted, else the same would be taxable. However, a switch from dividend to dividend-reinvestment option will not invite any tax liability. Since due to current tax laws, there is no difference between dividend reinvestment and growth, it is suggested that if the switch is being made before a holding period of one year, it should be done in the dividend reinvestment option. This would give a benefit similar to the growth option but without the attendant tax liability.

ELSS (Equity Linked Saving Schemes) mutual funds or tax saving mutual funds: Let me start off by telling you that there are plans to phase out the tax breaks on ELSS mutual funds with the introduction of the Direct Tax Code (DTC), so this avenue is going to be closed in the coming years. However, you can still invest in it this year and get tax breaks. These tax saving mutual funds are covered under Section 80C, which means that you can invest a maximum of Rs. 1 lakh in them, and reduce that amount from your taxable income. There is a lock-in period of 3 years on such funds, which means that you can’t sell these funds within 3 years of your purchase date. The limitation with this list is that it doesn’t contain any mutual funds that have been around for less than 5 years even if they performed well. For example – DSP Blackrock is a ELSS mutual fund that has been around for about 4 years, has done well during that time, but is missing from this list.

Name Inception Date 5 year returns Expense Ratio

Birla Sun Life Tax Relief – 96 March 1996 16.57% 1.96

CanaraRobeco Can Equity Tax Saver March 1993 22.31% 2.38

HDFC Tax Saver March 1996 17.80% 1.86

ICICI Prudential Tax Plan August 1999 15.48% 1.98

SBI Magnum Tax Gain Scheme – 93 March 1993 16.32% 1.78

Principal Personal Tax Saver March 1996 16.42% 2.19

Franklin India Tax Shield April 1999 17.34% 2.10

Sundaram Tax Saver Nov 1999 17.73% 1.96

Sahara Tax Gain March 1997 22.31% 2.50

Reliance Tax Saver August 2005 15.14% 1.88

Source: Value Research

http://www.onemint.com/2011/01/02/tax-saving-elss-mutual-funds/

Understanding ELSSELSS has become an important tool for tax saving ever since the Finance Minister raised the limit of investing in ELSS u/s 80-C from Rs. 10,000 to 1 Lakh. This also coincided with the stellar performance of the equity market and suddenly people were forced to take note of this newfound tax saving instrument. ELSS is like an equity mutual fund but with a mandatory lock in period of 3 years.

Although most of the ELSS are diversified in terms of investment style, there are exceptions like Pru ICICI Tax Plan, which is bent towards mid and small cap stocks as its style. Such funds are more aggressive and volatile as compared to normal diversified schemes. So it should be very clear to an investor that investing in ELSS is similar to investing in equity mutual schemes with a benefit of tax saving built in.

ELSS vs ULIPs ELSS ULIP

Invest in market instruments

√ √

Save tax under 80-C √ √Maturity tax free √ √

SellerMutual Fund company with prior approval of regulator

Life insurance companies (except UTI)

Primary objective Tax Saving Insurance + investment

PaymentsSingle payment; no future payment commitments

Premium to be paid for a minimum of three years

Lock-in 3 years 5 years

Upfront charges2.25% of investment (regulated)

5-7% of first years premium (not regulated)

Like in any mutual fund scheme, ELSS also gives a choice of growth or dividend option. Growth option will work like a normal FD or a NSC ie. it will not give any payouts during your holding period and give you the lump-sum at the end of the period of holding. In a dividend option the AMC can declare dividends, subject to available surpluses. Although dividends come out of your investments and there is no financial gain per se, it helps considerably by giving you the tax benefit on the whole investment amount and at the same time reducing the lock in period. This particularly helps if you invest in an ELSS just before the declaration of dividend. Usually the dividend effectively comes to 15-25% of your investment. Assuming dividend declared is 20% of the investment, and an investment of Rs.

50,000, you effectively pay only Rs. 40,000 (since the dividend of 10,000 is paid to you in about a week’s time), and still manage to get the tax benefit on the whole of Rs. 50,000. If you are in the tax bracket of 30%, it comes out to a tax saving of Rs. 15,000 on an investment of Rs. 40,000 (37.5%).Dividend reinvestment is another option and that has other advantages. In the above case if you invest Rs. 50,000 before the dividend date, Rs.10,000 will be reinvested in the same scheme by giving you a tax benefit on Rs.60,000, since Rs.10,000 will also be deemed to be your investment in ELSS. Any future dividends reinvested during the holding period will also be deemed to be fresh investments in ELSS and given tax benefit accordingly. Remember that dividend reinvested is locked for 3 years from the date of reinvestment but you also get the tax benefit on that particular date. Assuming that the same amount of dividend is declared for three years (practically it can be more), the effective tax saving comes to almost half of amount invested. The effective tax saving will be much higher if you decide to hold it for longer period (a 100% tax saving in a 5-7 year period can not be ruled out).

Article: As a tax-saving instrument, ELSS offers best value

If you are thinking of your tax-saving investments now, you are way too late in the financial year to be doing so. It’s true that the last day for making such investments is March 31, so you still have 65 days and about eight hours more. The way most invest, it is as if the law forbids tax-saving investments before about 2:30 p.m. on March 31. Unfortunately, the best way to make these investments is to plan them in April and then execute them throughout the year. So perhaps you should take the ideas in this article as guidelines not for what to do for 2009-10 but for 2010-11.

I find that for tax-saving investments, we tend to think about tax first and investments later. As long as something saves tax, its characteristics as an investment are paid less attention to. Much of the time, waking up late to these investments means that they are chosen more for convenience than for suitability.

For salaried individuals, it’s typical that you are told by your accounts department somewhere around January 25 to furnish proof of investment immediately or else extra money will be deducted from your February salary. At that point, your choice ends up being guided by convenience alone.

The three most important parameters for an investment are the risk-return trade-off, the liquidity-locking period trade-off and cost. I believe that given the mandatory lock-in of tax-saving investments, it makes sense for most investors to concentrate their investments into ELSS

mutual funds. These funds have the lowest lock-in-three years — among all tax-saving possibilities. Given the term of the investments, the chances are that you would earn far better returns than in any other options.

There are two other options that give equity-linked returns — ULIPs and the New Pension System. Of these, ULIPs have a long lock-in, at least 10 years, coupled with high costs and poor transparency. Moreover, investors have to commit to continuous payments for a certain period.

If they can’t keep up, then the effective cost shoots up to a ruinous level. However, since ULIPs are phenomenally profitable for insurance agents, you’ll have to be particularly thick-skinned to stand up to the intense sales pitch. In terms of sales intensity, the very opposite of ULIPs is the NPS — no one seems willing to sell it. That’s a tragedy because if you want your tax-saving investments to work towards your retirement kitty, then the NPS is likely the best option. However, the NPS should not be seen as investment avenue at all. It’s a retirement solution and has practically no liquidity till retirement age. Which brings us back to ELSS funds. These funds offer a combination of returns and a lock-in that is over relatively quickly. Considered purely as an investment, they are an excellent option. However, as I said upfront, this advice is for 2010-11. As in any equity investment, one should stagger one’s investments over a relatively long period of time. Ideally, you should estimate how much you’ll need to invest and start a monthly SIP for that much amount in April. However, if you haven’t done that, it’s still some time to go. Spreading your investments over equal amounts from now till the end of March is not a bad option, either.

(Dhirendra Kumar, CEO, Value research)

http://economictimes.indiatimes.com/personal-finance/tax-savers/tax-news/as-a-tax-saving-instrument-elss-offers-best-value/articleshow/5496387.cms?curpg=2

Tax saving equity mutual fund performance as on Feb 4th, 2011

Mutual Funds Search ResultsScheme Name Returns (%) Ranking On Date

Months Year Months Year

1 3 6 1Since Launch 1 3 6 1

Since Launch

Canara Robeco Equity Tax Saver – Growth -9.46

-12.46 -3.8 14.92 15.58 1 5 17 9 22 4/2/2011

HDFC Taxsaver-Growth -9.69-13.85

-1.43 16.27 33.56 2 10 6 4 5 4/2/2011

Tata Tax Saving Fund '96 -9.79-11.81

-0.15 10.57 21.38 3 3 2 20 15 4/2/2011

Quantum Tax Saving Fund-Growth -9.9

-11.65 1.64 19.57 42.93 4 1 1 1 3 4/2/2011

ICICI Prudential Tax Plan – Growth -10.05

-11.98

-1.63 14.8 25.48 5 4 9 10 12 4/2/2011

Franklin India Taxshield-Growth -10.12

-11.66

-0.16 14.46 28.72 6 2 3 11 10 4/2/2011

Sahara Tax Gain Fund-Growth -10.39-14.91

-2.77 15.5 27.92 7 14 14 6 11 4/2/2011

IDFC Tax Advantage (ELSS) Fund – Growth -10.48

-15.89

-2.97 14.27 35.29 8 19 16 12 4 4/2/2011

Birla Sun Life Tax Plan-Growth -10.79-13.47

-2.56 8.04 22.98 9 7 13 24 14 4/2/2011

LICMF Tax Plan – Growth -10.81-13.37 -1.5 9.38 7.87 10 6 7 21 34 4/2/2011

Fidelity Tax Advantage Fund-Growth -10.84 -13.5

-1.82 19.52 16.02 11 8 10 2 21 4/2/2011

Axis Tax Saver Fund-Growth -10.86-13.83

-2.32 16 14.04 12 9 12 5 25 4/2/2011

JM Tax Gain Fund-Growth -10.91-17.35

-10.05 0.8 -12.63 13 30 35 35 37 4/2/2011

ING Tax Savings Fund-Growth -11.08 -14.3-1.04 15.16 16.46 14 12 5 8 20 4/2/2011

Edelweiss ELSS Fund - Growth -11.28-16.97 -5 11.89 33 15 25 26 14 6 4/2/2011

HDFC Long Term Advantage Fund-Growth -11.62

-14.92

-0.75 17.25 29 16 15 4 3 9 4/2/2011

UTI Equity Tax Savings Plan 2000-Growth -11.65

-15.24

-2.85 8.81 17.43 17 16 15 22 19 4/2/2011

Reliance Tax Saver Fund-Growth -11.76

-17.37

-4.79 11.46 13.29 18 31 24 17 27 4/2/2011

Religare Tax Plan-Growth -11.82 -15.4-5.45 11.65 12.78 19 18 28 16 28 4/2/2011

Principal Personal Tax Saver Fund -11.83

-16.02

-4.74 8.72 24.97 20 22 23 23 13 4/2/2011

Franklin India Index Tax Fund -11.9 - - 11.18 15.33 21 11 8 18 23 4/2/2011

13.85 1.56

Magnum Taxgain-Growth -11.91-15.29

-5.25 4.94 18.48 22 17 27 31 17 4/2/2011

Kotak Tax Saver Fund-Growth -11.94-17.06

-4.82 10.93 11.3 23 28 25 19 31 4/2/2011

BNP Paribas Tax Advantage Plan-Growth -12.05 -17

-6.34 6.96 5.33 24 26 31 28 35 4/2/2011

JP Morgan India Tax Advantage Fund-Growth -12.05

-14.41

-2.02 15.39 31.62 25 13 11 7 7 4/2/2011

Taurus Tax Shield-Growth -12.11-17.87

-4.46 11.8 11.64 26 32 20 15 30 4/2/2011

DSP BlackRock Tax Saver Fund-Growth -12.19

-16.43

-5.79 12.35 12.53 27 24 29 13 29 4/2/2011

L&T Tax Saver Fund-Growth -12.26-17.02

-3.89 7.44 8.4 28 27 19 27 33 4/2/2011

Baroda Pioneer Equity Linked Saving Scheme 96 -12.33

-15.93

-3.87 7.5 13.94 29 21 18 26 26 4/2/2011

Sundaram Taxsaver-Growth -12.33 -15.9-4.52 6.67 20.9 30 20 21 29 16 4/2/2011

HSBC Tax Saver Equity Fund-Growth -12.41

-17.15

-4.59 8.02 8.43 31 29 22 25 32 4/2/2011

Escorts Tax Plan -12.53-19.48

-10.44 3.22 14.98 32 34 36 33 24 4/2/2011

Birla Sun Life Tax Relief 96-Growth -12.84

-18.01

-7.77 6.16 30.41 33 33 32 30 8 4/2/2011

Principal Tax Savings Fund -12.91-16.41

-6.05 4.71 17.49 34 23 30 32 18 4/2/2011

Bharti AXA Tax Advantage Regular-Growth -13.24 -19.8

-8.29 -2.61 46.31 35 36 34 37 2 4/2/2011

Bharti AXA Tax Advantage Eco-Growth -13.26

-19.76

-8.18 -2.38 46.63 36 35 33 36 1 4/2/2011

DWS Tax Saving Fund-Growth -13.97-20.31 -11 3.05 5.22 37 37 37 34 36 4/2/2011

Other Schemes

http://economictimes.indiatimes.com/pf_taxsavingsschemes.cms

Best performing tax saving funds as on Feb 08,2011

Saving tax when selling property with example

You can invest the proceeds in capital gains bond or reinvest in another residential property.

Property values have shot through the roof. There are many who are, hence, investing in property these days. Property may be sold either to buy another one or to book a profit, when the valuations have become attractive.

Vikram was doing the latter. He was getting transferred out of Mumbai, to his home city, Delhi. He had bought a house in a Mumbai suburb, about six years earlier. He is now interested in selling it, as he plans to settle in Delhi and he even has a buyer for it. He is seriously considering that, but wanted to know a bit about the tax options surrounding the sale of the property.

When a property is sold and the profits are retained, taxes have to be paid. In property transactions, normal income tax does not apply; capital gains taxes do. For properties sold after three years of acquisition, long-term capital gains (LTCG) tax applies. Short-term capital gains (STCG) apply for properties sold less than 36 months after being bought. These are at the applicable tax rates for an individual. LTCG tax is 20 per cent, after applying the cost inflation index. The index is applied to compensate for the effect of inflation, over time.

OPTIONS

He has the option of paying the tax computed after indexation at 20 per cent and invest in a good instrument and earn good returns. If he invests in equity mutual fund schemes, for instance, he will be able to get good double-digit, tax-free returns. This is a good option, too, as one need not invest in low-yielding propositions for the sake of saving tax or be forced to invest in another property. But then, many people want to save taxes at all costs. If Vikram does not want to pay tax, he can also invest the gains in capital gains bond (under Section 54EC of the Income Tax Act). These bonds are issued by entities like Rural Electrification Corporation (REC), National Housing Bank (NHB), and so on.

TAX MATH

* If the house is sold within three years of purchase, you need to pay short-term capital gains tax

* The proceeds under STCG are added to your income and taxed as per your slab

* If you sell the house three years after the purchase, you need to pay long term capital gains tax

* This is taxed at 10 per cent of the gains or 20 per cent with indexation benefits

* You can save LTCG by investing in capital gain bonds that REC or NHB issues

* The return on these bonds is around six per cent with a lock-in of three years

* A person needs to invest in these bonds within six months of selling the property and can only invest up to '50 lakh in one financial year

There is a six-month window to purchase these bonds, once you have sold the property. Currently, they yield about six per cent and have a lock-in period of three years.

The problem in this case is that though Vikram would be able to save tax by investing in these bonds, he is also potentially losing, as the interest rate on these bonds is low. In addition, the income from these bonds is taxable. And, the maximum one can invest in a capital gains bond is Rs 50 lakh for a financial year. However, if the transaction has happened after October 1 of the year, then the window flows to the next financial year, too, allowing one to invest up to Rs 1 crore. Vikram has another way of saving tax. He can buy another property for the value of capital gains. This comes under Section 54 of the I-T Act. Such a property can be bought a year prior to the sale or within two years after. In case of construction of property, the time allowed is three years from the date of sale.

In the meanwhile, the gains need to be deposited in a capital gains deposit account before the date for filing returns. Any unutilised amount of this capital gains after the stipulated period will be charged to income tax in the ‘previous year' at the end of the three year period. So, part-utilisation is possible. Vikram also wants to know if he can sell his house in Mumbai and buy another in Delhi, the city he will reside after the transfer. It is permitted to buy a property anywhere in the country. There is a bit of ambiguity on whether one can invest the proceeds in one residential property or more than one. From a strict reading of the clauses, it is safe to assume the proceeds need to be invested in a single residential property.

Vikram's friend, Gaurav, has another problem. He has sold a commercial property and would like to save the capital gains tax. This is possible, too, under Section 54F of the I-T Act. This is applicable for capital assets other than a residential property. So, a person can save capital gains on gold too, which is treated as a capital asset.

There is one major difference as compared to the sale of residential property and the capital gains treatment thereon. Here, Gaurav will have to invest the entire proceeds from the sale in a residential property. The time frames for investment remain the same as in the case of sale of residential property. This, however, will work only if he does not own more than one residential house on the date of transfer of the original asset, excluding the one he would purchase to save capital gains tax. It is now up to Vikram to decide if he wants to buy a property or pay the tax and invest elsewhere.

Tax saving along with reasonable returns

During this time of the year, taxpayers find themselves flooded with mails and SMS’s goading them to invest in Section 80C instruments. Both insurance companies and mutual funds pitch their life/medical policies or equity-linked saving schemes (ELSS). Investing in ELSS, however, might soon be passé. If the Direct Taxes Code is implemented next year in its present form, this year would be the penultimate year in which you will get benefits from investing in ELSS under Section 80C.

A mutual fund scheme has to invest at least 65 per cent of its corpus in equities to get benefits under Section 80C. ELSS comes with a mandatory lock-in of three years. But, this period is much lesser than that of other instruments such as the Public Provident Fund of 15 years (six years for partial withdrawal), National Savings Certificate (six years) and unit-linked insurance plans (Ulips) of five years. Over a three-year period, ELSS returned 1.30 per cent as against equity diversified funds' 1.27 per cent. Besides the benefit in the first year, returns from these schemes have been quite good. According to mutual fund tracking agency Value Research, the ELSS category has returned 13.07 per cent annually, as compared to equity diversified funds' 12.48 per cent, as on January 25 this year.

Financial experts feel the main advantage of investing in ELSS is that it ensures forced investment in equities. "ELSS gives the dual benefit of tax saving and equity investment," says Nirav Panchmatia, founder and director, AUM Financial Advisors. However, the allocation to ELSS should be decided only after calculating the amount spent for purchasing a term insurance and contribution made towards the Employee Provident Fund, says Govind Pathak, director, Acorn Investment Advisory Services. It is because if one has already exhausted the limit by investing in these instruments, an equity-diversified fund can be a better option because of its

liquidity — one can enter or exit the scheme when one wants. Like any equity scheme, ELSS offers both dividend and growth options. The growth option gives better returns as the interest income gets reinvested and compounded. Those in need of cash or pensioners should opt for the regular payouts or dividend option. The interest income is tax-free because you hold the units for over a year. But you have to pay the securities transaction tax of 0.25 per cent at the time of maturity.

It is advised to invest a lump sum in ELSS. "A systematic investment plan (SIP) works only if the tax benefits are to continue in the next financial year". Also, if you are already late, starting an SIP will not make much sense. Opt for an SIP in ELSS from the start of the financial year, if you want to have a disciplined approach. However, the lock-in period can be a deterrent, according to many financial planners. "Equities can be volatile. And, if the fund value erodes over three years, you cannot do anything," feels Gaurav Mashruwala, a certified financial planner. A three-year period may not be sufficient for your equity investments to appreciate significantly either, he adds.

7 super tax saving, fixed income plans

If you like the safety of a steady predictable income, every month, quarter or year, then there are a number of tax-saving instruments available for you. In fact, most of the tax-saving paper you could buy earlier was in this category.

For those who are uncomfortable with fluctuating incomes that market-linked instruments give, these are the products for you. Admittedly, returns from fixed income instruments averaging about 8 per cent a year, do not even compare with those from equity-related products that have returned over 40 per cent in the last few years. But then, the return you get is also market risk-free. At the end of every designated period, you know you will get a certain amount.

And that imparts stability to a portfolio. They are suitable for investors who need to cut down on the risk, such as people nearing retirement. For them, these could even form the mainstay of their portfolio. The choice you have is fairly wide. (See Table below: Fixed Income Tax Saving Options)

Vantage points

Three important things that one needs to look at before investing in any of the mentioned fixed income instruments are taxability of interest income, frequency of income, and tenure of investment. Even if the interest rate on the Senior Citizens' Savings Scheme (SCSS) is 9 per cent per annum, the income is fully taxable. This means that for someone in the highest tax-bracket, the actual return after-tax will be only 6.22 per cent.

Similarly, if your need is a regular monthly income, the instrument with the highest post-tax return, public provident fund, may not be the right choice. Only three of the fixed income instruments that qualify for relief under Section 80C give a regular stream of income. The SCSS pays interest quarterly, 5-year notified bank deposits half-yearly, and time deposits annually.

So, it appears that there is nothing for anyone who is looking for steady monthly income. But that is not quite correct, although you would have to get a little active about your investments in that case. Rather than putting in a lump sum when the taxman is almost knocking on your door at the end of the financial year, you can invest throughout the year. That, de facto, will give you steady monthly or quarterly returns as the instruments mature in a phased manner.

So, you can invest and rest assured that your money is safe, although inflation can eat away at it quietly.

Fixed Income Tax Saving OptionsInvestment in all these instruments qualifies for Section 80C deduction and gives a guaranteed fixed income. Only endowment life insurance plans give bonus-based returnsInstrument available Duration

(yrs)Returns (%) Compounding Taxability of

incomeYieldª (%)

Bank Fixed Deposit (Tax savers)

5 8.50¹ Quarterly Interest taxable

5.87

Employee Provident Fund

Till retirement

8.50² Yearly Tax-free 12.30

Life Insurance (Endowment)

10 and more

Around 6.00³

Yearly Tax-free 8.68

National Savings Certificate

6 8.00 Half-yearly Interest taxable

5.53

Post Office Time Deposits

5 7.50 Quarterly Interest taxable

5.18

Public Provident Fund

15 8.00 Yearly Tax-free 11.57

Senior Citizens' Savings Scheme

5 9.00 Quarterly Interest taxable

6.22

ª Applicable to 30% tax slab, including education cess | ¹ May vary from bank to bank | ² Fixed by govt each year | ³ Internal rate of return based on bonuses

Tax benefits for senior citizens

1) The Income Tax Act identifies a senior citizen as a person who is 65 years of age or more at any time during the previous year. It provides for special benefits for such persons.

2) As per the IT Act, senior citizens who have an income up to Rs 2.4 lakh per annum are eligible for tax exemption.

3) Senior citizens receive a higher interest (up to 50 bps) on a 5-year fixed deposit, which is eligible for deduction from the total income under Section 80C.

4) Senior citizens can claim exemption on the tax deducted at source (TDS) on interest income earned on deposits. It can be done by submitting Form 15H under Section 197 of the IT Act.

5) Under Section 80D, the limit on the premium paid for medical insurance goes up to Rs 20,000 if the person covered under the policy is a senior citizen.

Courtesy: Centre for Investment Education and Learning ( CIEL ))

How to reduce tax on your retirement benefits

Perhaps one of the most ignored challenges after retirement is to manage your benefits. Ironically, you are anxious about everything else: the sharp fall in income, life without

colleagues, lack of drive, and so on. But for obvious reasons, you are excited about the benefits—provident fund, gratuity, leave encashment, superannuation fund, etc.

However, not all these returns are exempt from tax. So, it is important to distinguish the ones that are tax-free from those that are not. You should also be aware of ways to steer clear of such tax ‘traps’.

If you are a government employee, there can be a marked difference in the way your funds are taxed. “There is tax exemption on certain receipts such as commuted pension, gratuity, leave encashment, etc. Private sector employees are generally taxed on the basis of prescribed rules,” says Suresh Surana, founder of RSM Astute Consulting, which offers specialised accounting and auditing services. Let’s take a look at the taxable and tax-free benefits and learn how to reduce your burden.

Provident fund: It is completely tax-free. However, ensure that your office invests it in a recognised provident fund. “Unrecognised provident funds have different tax structures compared with the recognised ones. Further, the employer’s contribution and interest credited to such funds are taxable as income in the year of receipt,” says Surana.

When it comes to the Employee Provident Fund (EPF), the interest and amount paid at retirement are not tax-free if your employer had been contributing more than 12% of your salary to the account. Similarly, the interest “credited in excess of 9.5% per annum is included in gross salary”, says Ameet Patel, partner, Sudit K Parekh.

The benefits of working continuously for five years with an organisation are widely known. “The payment of accumulated balance from a recognised provident fund (RPF) is taxable unless the employee has worked continuously with a firm for five years,” says Sandeep Shanbhag, director at tax and investment advisory firm Wonderland Consultants.

However, if you know you are going to retire in less than five years of joining a new company, you can secure tax-free RPF on retirement by making sure you transfer the EPF account from the

previous company to the current one. Gratuity: This is one corpus where government employees have an edge over others.

“Gratuity is a lump-sum payment made by an employer for long and meritorious service rendered by an employee,” says Surana. Any amount that the government employees receive is exempt from tax, but there is a cap for non-government staffers. For employees covered under the Payment of Gratuity Act, the cap is the least of the following: a) actual amount received b) 15 days’ salary for each year of service c) Rs 10 lakh. “The salary for 15 days is calculated by dividing your last drawn salary by 26, which is the maximum number of working days in a month,” says Surana.

There could still be situations when you end up paying tax on gratuity. “Any gratuity received by an employee who is covered under the Payment of Gratuity Act and has worked for less than five years is fully taxable,” says Shanbhag. The clause, ‘completion of the five years’ service’ is not applicable in the case of death or disablement of an employee. Also, employees who are not covered under the Act do not have to complete five years of service to get tax-free gratuity.

Superannuation fund: The amount received as superannuation is exempt from tax if it is paid on death, retirement, in lieu of or as annuity. “Any commutation of pension is exempt up to one-third of the commuted value of pension, where the employee receives any gratuity and half of such value otherwise”. The interest that is accumulated on the superannuation fund is taxed under certain circumstances. “This exemption is not available if the employee resigns”.

“The escape route in cases where the amount becomes taxable is to purchase SAF (state annuity fund)-related annuity without any commutation. If you don’t do this, TDS (tax deducted at source) will be applicable on the average rate at which the employee was subject to during the preceding three years or during the period, if it is less than three years, when he was a member of the fund,” notes Shanbhag. The rest of the amount is exempt from tax only if annuities are purchased from life insurance companies.

Leave encashment: “The tax treatment of leave encashment depends on the status of the employee as well as the point at which the leave is encashed, that is, during employment or at the time of retirement,” says Surana. Leave encashment during the period of employment is taxed, but not at the time of retirement or leaving a job, adds Surana. Any amount received as leave encashment by the state or central government employees is exempt from tax. However, the bar is stricter when it comes to others. The amount of encashed leave that is exempt from tax is the lower of Rs 3 lakh and the amount paid according to a calculation specified by the Income Tax Act. “The taxable portion of leave encashment would form a part of the normal salary income and would be taxed as per the normal slab rate applicable to the employee. There is no special rate for this,” says Patel.

Voluntary Retirement Scheme: “VRS is applicable only to those employees who have completed 10 years of service or are over 40 years of age,” says Surana. When you opt for the voluntary retirement scheme, the company will pay you a compensation, which is tax-free if it is lower of the two: Rs 5 lakh or the last three months’ average salary multiplied by the number of years of service. Beyond that, it is added to the income and taxed accordingly. There are ways to avoid being slotted in the higher income tax bracket because of the hefty compensation paid in the year of retirement. “This exemption is also available if the VRS amount is paid in instalments spread over several years. Staggering this amount would mean that the employee not have to pay the entire tax upfront but is subjected to TDS as and when the instalments are paid,” says Shanbhag. Moreover, employees will also benefit from the interest on the outstanding VRS amount at a rate much higher than the market rate and from a safe source: his erstwhile employer.

New Pension Scheme: The central and state government employees who joined service in and after January 2004 are entitled to pension via the New Pension Scheme. Though they get tax benefits when they invest in this scheme, the amount they receive at maturity from this scheme is taxed. Also, the hefty bonus they get as golden handshake is fully taxable. “There is no exemption for such a payment,” says Patel. Any other amount that is not mandatory—that the employer pays of his own volition—is taxable.

The bottom line: the amount of tax you save on your retiral benefits will depend on how well-informed you are about the rules governing their taxation.

During the last few months of a financial year you see people making last moment impulse decisions to invest in tax saving instruments and in the process they may end up buying products which are not right for them. Tax planning should be done a few months in advance as it gives you ample time to understand and evaluate different options that are specific to your financial situation. Start your tax planning now for Assessment Year 2010-11.

Here are some simple tips for planning your taxes this financial year:

I. Utilise Income Tax exemptions

Section 80C: This is the most popular exemption as you can claim up to Rs. 1 lakh in deductions. The options include Employee Provident Fund (EPF), Public Provident Fund (PPF)- up to Rs.70,000 per annum, National Savings Certificate (NSC), 5-year bank fixed deposits, Life insurance policies, Equity-Linked Savings Schemes (ELSS), Unit Linked Insurance Plans (ULIPs), school fees, and home loan principal repayment. For making investments in this section you will have to decide on the ideal debt vs. equity mix that is right for you based on your age, risk-return profile and goals.

Section 80D: If you have taken a medical insurance plan for yourself, your spouse, dependant parents or children, you can claim deductions up to Rs 15,000 (and additional Rs 15,000 for your parents' medical insurance) under Section 80D for the premiums paid. The limit now has been enhanced to Rs 20,000 for senior citizens on the condition that the premium is paid via cheque.

Section 80DD: Expenses on the medical treatment of a dependent with a disability qualifies for tax benefits under Section 80DD. In this case, deductions up to Rs 50,000 or 75.000 can be claimed based on the severity.

2. Interest on your home loan

The interest component of your home loan is allowed as a deduction under the head 'income from house property' under Section 24(b) up to a limit of Rs 1.5 lakhs a year in case of a self-occupied house.

The claim can be made even on loans taken for repair, renewal or reconstruction of an existing property.

3. Shuffle and switch strategy

Shuffling is a popular strategy used by ELSS investors which have a mandatory lock-in of 3 years. If you have been investing Rs 50,000 for the past few years and don't have cash to invest this year, you can easily redeem investments made 3 years ago and re-invest that amount this year to claim the benefits.

You will not have to pay any long term capital gains since you will be redeeming after more than a year. Thus you can enjoy tax benefits without making any fresh investments. Only risk is that the NAV can go up or down in the shuffle process and you may end up making a small profit or loss.

Some fund houses allow switch option for tax benefits. Let's say an investor with previous ELSS investments doesn't have money to make further investment in the current financial year 2008. He could consider switching it to a liquid fund and back into the ELSS fund within a short span of time like 10-15 days to enjoy the tax benefits.

4. Charitable donations are tax smart

While donations should not be made simply for tax purposes but for philanthropic reasons, you can always make a couple more at the end of the year to lower your tax. You get a tax relief if you donate to institutions approved under Section 80G of the Income Tax Act.

The rate of deduction is either 50 or 100 per cent, depending on the choice of the charity fund. There is no restriction on the amount given to charity. However, donations must be made only to specified trusts and also only donations of up to 10 per cent of your total income qualify for such a deduction.

Remember to get receipts whenever you make any charitable donation. Please remember that tax exemption is only an added advantage of charity and it should not be the primary reason for doing so.

5. Divide your income

Normally, if you invest in your wife's or child's name, the income generated from such investments will be clubbed with your income and taxed accordingly. However, if you transfer

money through a deed to a child who is over 18 years of age and invest in his name, then the income generated from such investment will not be clubbed with your income. Instead, that will be clubbed with the income of your child/wife and taxed accordingly.

Cash gifts received from specified relatives are exempt from income tax and there is no upper limit. Similarly, cash gifts of any amount and from anyone received during your child birth, marriage or any other specified event are totally tax-

free. However, any cash received from a non-relative where the value is in excess of Rs 50,000 in a particular year will be considered as income in the hands of the recipient.

You should make sure that you have a record & valid receipts for all tax savings investments made in your name. You do not want to be running around at the last minute collecting all the documents required for tax filing.

In a nutshell remember the following:

Combine your tax planning with your financial plan so that the products you invest in match your risk profile and your future goals

A home loan is not necessarily a bad debt. Consider getting a loan while buying a home. Charity is good- not only for the receiver, but the giver as well; Check on the validity and

receipts before you claim that deduction u/s 80G Take advantage of the tax breaks that the IT sections 80C, 80D and 80DD offer. Insuring oneself makes sense- as the premium is exempt u/s 80C (upto 1 lakh) and the

maturity amount is tax free By taking medical insurance, you not only insure your family against medical expenses,

you also get a tax deduction u/s 80D- so take that cover today! File your taxes on time!

Impact of DTC

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.

Latest Infrastructure bonds issued

REC Tax Free Infrastructure Bonds under Section 80CCF

Public sector undertaking, Rural Electrification Corporation (REC), has launched its Long Term Infrastructure Bonds. These bonds offer a tax benefit under section 80CCF. Investments in long term infrastructure bonds provide investors a maximum tax exemption

limit of Rs. 20,000 under section 80CCF, over and above what is available under section 80C

Rural Electrification Corporation was recently categorized as an Infrastructure Finance Company by the Reserve Bank of India. With its public issue of infrastructure bonds, the company plans to raise Rs 50 crores. The issue has a greenshoe option, in case of over-subscription, to issue additional bonds. The bond issue opened on 12th January 2011 and would be available for subscription till 28th March 2011.

Key Features of the Issue

Ø Eligible Investors

Resident Indian individuals and HUFs only.

Ø Credit Rating

The bonds have been rated ‘AAA /Stable’ by CRISIL, ‘CARE AAA’ by CARE, ’LAAA’ by ICRA and ‘AAA (IND) by Fitch.

Ø Available in Demat as well as Physical Form

REC Infrastructure bonds are available in physical as well as in demat form. So even if you do not have a demat account you could still invest in these bonds.

Ø Minimum Application

The bonds come with a face value of Rs. 5000. Investors would have to make a minimum investment of two bonds. i.e. Rs. 10,000.

Ø Lock in period and Maturity

The bonds have a lock in period of five years, and a total maturity period of ten years. They will be listed on both the NSE and the BSE. Trading of the bonds would be permissible only after the initial lock in period.

Ø Series Available in the Bond Issue

There are two options available for investors in the REC issue

Series 1: Offers 8% annual interest and a buyback after 5 years.

Series 2: Offers 8.10% annual interest with no buyback.

Ø Application Process

Application forms for the issue could be obtained from any one of the empanelled arrangers of REC. For the list of available empanelled arrangers click on the link provided here: http://www.recindia.nic.in/download/REC_infra_bonds_brokers.pdf

Application Forms can be deposited with all branches of UBI, IDBI & designated branches of HDFC & Canara Bank. Click below for a list of designated branches. http://www.recindia.nic.in/download/REC_infra_bonds_desig_branches.pdf

REC Issue at a Glance

The REC infrastructure bond, as opposed to other bonds issued earlier, provides investors only an annual interest option. No cumulative interest option is available. If you do invest in these bonds, you could claim your tax deduction under section 80CCF and utilize the annual interest earned to invest in other investment avenues. Annual interest is paid out through ECS facility, at par cheques or Demand Drafts, as per the investor’s choice.

IDFC Long Term Infrastructure Bond under Section 80CCF- Public Issue 2

Infrastructure Development Finance Company (IDFC) has launched its second tranche of public issue of long term infrastructure bonds, under section 80CCF. Section 80CCF provides tax payers an additional tax deduction to the extent of Rs 20,000 for investments in long term infrastructure bonds. This deduction would be over and above the Rs. 1, 00,000 existing under section 80C.

The IDFC Public Issue-Tranche 2

In September 2010, IDFC came up with its first instalment of public issue, with 4 series of bonds. It managed to raise around Rs. 471 crores in the issue. This second instalment of the public issue is a follow up of the first one and is open from January 17, 2011 to February 4, 2011, for investors.

Key Features of the Issue

Ø Who Can Apply

The bond issue is applicable only for resident individuals and HUFs. NRIs, FIIs and OCBs are not eligible to participate in the issue.

Ø Credit Rating

The bond has been assigned a “LAAA” rating by ICRA and an “AAA” rating by Fitch. The ratings speak of IDFC’s comfortable liquidity position, sound asset quality and timely servicing of debt.

Ø Demat Account not a necessity

The bonds will be issued in both dematerialised and physical form. It is therefore not necessary for investors to have demat accounts. No TDS shall be deducted on the interest received if the bonds are kept in demat form. There will however be TDS for bonds kept in physical form when interest exceeds Rs. 2,500 p.a.

Ø Minimum Application

The bonds come with a face value of Rs. 5,000. The minimum subscription amount is Rs. 10,000, which means, investors would have to subscribe to a minimum of two bonds per application.

Ø Lock-in Period and Maturity

The bonds have a minimum lock in period of five years, and a maturity of ten years. They would be listed on the BSE as well as the NSE. Investors can trade their bonds after the initial lock in period of five years. Loans can be obtained against the bonds, by pledging them after the lock-in period.

Ø Different Series in the Bond Issue

There are only two series offered in this issue, unlike the first issue where four options were offered.

Series 1: Offers 8% returns annually.

Series 2: Offers 8% cumulatively.

Both series allow a buy back route after the initial lock in period of five years.

Ø Application Process

Application forms for the issue could be obtained and submitted at these collection centers.

· HDFC Bank

· ICICI Bank

· Kotak Mahindra Bank

· IDBI Bank

· Axis Bank

Alternatively online applications could be submitted, if you have an online trading account with any one of the above banks.

So should you invest in Long Term Infrastructure Bonds?

Long Term Infrastructure Bonds, may probably be yielding relatively lower returns when compared to various other investment options. However one must remember that, when the tax benefit under section 80CCF is considered, the effective net yield on maturity increases. Nevertheless, this investment is best suited for individuals who fall in the highest tax bracket.

IDFC Issue at a glance

*Source: IDFC Tranche 2- Prospectus

Tax Deductions under Section 80E for Education Loans

Education loans are a convenient and popular option for many, to meet the cost of higher education. Did you also know that under Section 80E of the Income Tax Act, repayment of this education loan could be used to claim a deduction? Read on to find out, what this section offers and how to utilize it to your benefit.

Deduction in Respect to Repayment of Education Loan

If you have taken an education loan from any financial institution or an approved charitable institution, Section 80E provides a tax deduction on the loan interest that you are paying.

Who is Eligible?

Individual assesses only. So, if you are part of an HUF, this deduction cannot be claimed by you.

Deduction Limit

The entire interest paid on the education loan could be used to claim a deduction. There is no cap on the deduction amount. However, one needs to remember, that there is no tax benefit on the principal repayment of the loan.

Scope of Deduction

The loan should be taken for the sole purpose of higher education. It could either be for the individual, spouse or children. Loans for the higher education of siblings, in-laws, nephew or niece, will not qualify for any deduction. Also, from assessment year 2010-11, deduction could be claimed for the student for whom the individual or assessee is the legal guardian.

The education loan should be taken from either a financial institution or an approved charitable trust. Loans taken from friends, employer or relatives do not qualify for a deduction.

Courses Eligible for Deduction

From assessment year 2010-11, the government has extended the benefit in Section 80E to all streams of studies including regular courses as well as vocational courses, pursued after passing the Senior Secondary Examination from a recognized Board.

Education Loans taken for full time courses only are eligible. Any graduate course (as mentioned above), or, post-graduate courses in engineering, medicine, management, applied sciences, mathematics or statistics are considered for a deduction. No deduction is available for part-time courses.

Deduction Period

The deduction is available for a total of eight years or till the principal and interest amount have been repaid, whichever comes earlier. This eight years would include the year in which the loan repayment starts and seven years following this year. So even if your loan tenure exceeds these eight years, no deductions can be claimed beyond this.

Key Factors to Keep in Mind

a) Loan should be in the name of individual claiming deduction. No deduction can be claimed for loans in the name of parents, spouse or sibling; even if the loan was taken for your studies.

b) The course need not be pursued in India. Loans for overseas courses are also permissible for a deduction.

c) Deduction would be applicable only when the individual starts repaying the loan.

A final word…

The benefit under section 80E is over and above the tax benefits under section 80C. So if you have utilized your limit under section 80C, this could be a further opportunity to reduce your tax outgo.

BIBLIOGRAPHY

WWW.SMARTINVESTOR.IN

WWW.VALUERESEARCH.COM

http://www.onemint.com/2011/01/02/tax-saving-elss-mutual-funds/

http://www.recindia.nic.in/download/REC_infra_bonds_brokers.pdf  

http://www.recindia.nic.in/download/REC_infra_bonds_desig_branches.pdf

http://economictimes.indiatimes.com/pf_taxsavingsschemes.cms

http://economictimes.indiatimes.com/personal-finance/tax-savers/tax-news/as-a-tax-saving-instrument-elss-offers-best-value/articleshow/5496387.cms?curpg=2

WWW.ECONOMICTIMES.INDIATIMES.COM/PERSONAL-FINANCE

WWW.MONEYCONTROL.COM

ACKNOWLEDGEMENT:

This project provides me great opportunity of learning new interesting areas of investment

analysis and portfolio managemnet. At the same time I express my deep sense of gratitude

towards MS.RUCHI BHANDARI without whose guidance and help this project would not have

been a success. I owe a sincere gratitude towards her for her untiring and instant academic and

intellectual support and guidance. Without her assistance I would not have got the conceptual

clarity. My thanks are also towards the Library of the College as, if they wouldn’t have provided

me with the data I would not have been able to complete the project.I sincerely hope that this

project live up to his expectations.