THE finance minister has put more money in the hands of a large section of tax-payers. There are also some additional tax breaks in the form of investments made into infrastructure bonds and health insurance. Our Personal Finance team speaks to experts on the best way to manage the additional income depending on your age group.
IF YOU EARN BETWEEN RS 1,60,000- 5,00,000
Assuming you earn Rs 5 lakhs per annum, you would end up saving Rs 20,601 a year as taxes, which translates into a monthly saving of Rs 17,17 a month.
For working men and women
When seen as the incremental earning for the month the amount may appear small. However, even a small hike can lead to large savings.
This is extra money coming your way and you would do well to invest it, rather than spend it. According to him, if you are under insured, this is the time to ensure that you adequately cover yourself, with the extra amount you have for yourself.
Once that is done, assuming you want to invest Rs 1.2 lakhs (Rs 1 lakh under section 80C and Rs 20,000 under infrastructure bonds), go for a for a debt: equity ratio of 50:50 between equity and debt. Invest Rs 60,000 in your employers Provident fund or PPF, infrastructure bonds and your insurance plans,. The balance Rs60,000 should be invested in ELSS schemes, thereby helping you to achieve your growth objective saving taxes .
For senior citizens
When you are above 60, health care is of prime importance. Senior citizens could use the money saved to increase their health cover. Besides this, the additional money could go into debt in schemes like the post office MIP, PPF or NSC or monthly income plans of mutual funds.
IF YOU EARN BETWEEN RS 5,00,000-8,00,000
There is a bonanza for tax payers in this bracket as the percentage amount of tax they save would be highest among all brackets. Everyone in this bracket will now pay tax at 20%, plus education cess of 3%. The increase in annual disposable income would vary between Rs 20,000-51,000.
For working men and women
1) The additional amount left in their bank account could be utilised to prepay a part of their home loan this year. This is important in the light of the Direct Tax Code - which could do away with tax benefits on interest paid on home loan – coming into force from April 1, 2011.
2) The surplus could also be used to buy or enhance your health insurance cover. A lot of taxpayers do not exhaust the deduction of Rs 15,000 on health insurance premium paid (under section 80 D), as they simply do not have any surplus to do so.
3) The Budget also offers an additional deduction of up to Rs 20,000 – over an above the deductions allowed under section 80 C of up to Rs 1 lakh – for investing in infrastructure bonds to be notified by the central government. This is approximately the amount that someone earning Rs 5 lakh would save due to change in slabs, which could be directed to these instruments.
4) Make sure that you invest to fufill your financial planning requirements, and not merely to save on taxes. For instance, if someone earning Rs 6,00,000 invests Rs 20,000 in the proposed infrastructure bonds in 2010-11, he/she would save Rs 4,000 in taxes that year. If the amount is not redeemed for five years, it could grow to Rs 30,000 (assuming the bonds will carry an interest of 8% per annum). However, the gain of Rs 10,000 could be taxable in the hands of investor (clarification from the government is awaited on this aspect). The return would barely beat inflation. If the same amount is directed to equities or equity mutual funds, the investment could be worth Rs 40,000 after five years, assuming a return of 15% CAGR. Therefore, those falling in this tax bracket should ascertain if they would want to lock in their money for say five years merely from the short term viewpoint of obtaining tax incentives.
For Senior Citizens
Senior citizens can use the additional savings (Rs 20,000-50,000) to enhance their investments in secure instruments like 9% senior citizens savings scheme (SCSS). The scheme comes with a lock-in period of five years, but yields quarterly interest at the rate of 9% per annum, thus ensuring liquidity. While returns above Rs 10,000 are taxable, investment made under the scheme is allowed as deduction u/s 80 C.
IF YOU ARE EARNING RS 8,00,000 AND ABOVE
For men and women
This income slab would be witnessing maximum tax savings in absolute terms of up to Rs 51,500 because of changes in income tax slabs. However, this income category would have exhausted the Rs 1 lakh limit under Section 80 C with the PF component of their salary and insurance. They could look at property investment as a tax saving instrument. They are in a position to invest in more than one property because of higher surplus income. If you buy a second house, any one property as per your choice is treated as self-occupied and its annual value is computed to be nil. The other house property is considered to be rented out hence a notional rent income will be considered as income under the head 'Income from House Property'. You can also avail of a deduction equal to 30% of the annual value of the house property is allowed as deduction towards repair and maintenance charges. You can also benefit from the loss of house property clause while computing taxes. The income earned from each of the properties is computed separately. If such a calculation results in a loss, it is allowed to be set off against your income from other heads. For example, if your annual interest component of the housing loan is Rs 6 lakh and you are earning a rental of Rs 2 lakh, there is a total loss of Rs 4 lakh. In such case there is a provision to offset this loss. The deduction for interest payable on home loans is not subject to any overall limit. But the limit of Rs 1, 50, 000 is applicable only for one self occupied property.
For Senior Citizens
It's difficult to find too many senior citizens in this tax bracket. From a tax-saving perspective, senior citizens should look at lesser lock in periods ranging from 3-5 years compared to their younger peers. In fact, easier exit option than tax saving should be a priority for senior citizens so as to provide for unexpected contingencies. These citizens could look at NSC, tax saver fixed deposits or senior citizens savings scheme.
