Taxation and Tax saving

Income and expenses are two sides of the same coin. And one liability that you cannot afford to turn a blind eye to is income tax. While you cannot evade paying taxes, the best you can do is to minimise their effect on your wallet. 

What are the Tax Slabs ? 
The basic exemption limit for personal income tax is:
Rs 200,000.
Rs 250,000 for the age of 60 years or above but below 80 years.
Rs 500,000 for resident individuals of the age of 80 years and above

Income tax rates for the tax year 2012-13 applicable for individuals, Hindu Undivided Families, Association of Persons and Body of Individuals, can be tabulated as follows:

Total Income

Tax Rates

Up to Rs 200,000 (for individuals below age of 60 years )

Nil

Rs 250,000 (for resident individuals of 60 years or above and below 80 years)

Rs 500,000 (for resident individuals of the age of 80 years and above).

200,001 - 500,000

10%

500,001 - 1,000,000

20%

1,000,001 upwards *

30%

 

Note:

  • Education cess is applicable at a rate of 3 per cent on income tax (inclusive of surcharge, if any)
  • Marginal relief may be provided under specific conditions
  • Income Tax Implication for Mutual Fund Unit Holders

Income Tax Implication for Mutual Fund Unit Holders


What is Section 80 C ? 
No matter what tax bracket you fall under, Section 80 C of the Income Tax Act acts as a saviour, outlining deductions that can be made from your taxable income. 

  • Section 80 C allows certain investments and expenditures to be exempted from tax.
  • You need to invest in the instruments specified under this Section and deduct that amount from your gross income. You are liable to pay tax only on the income derived after this deduction.
  • Investments up to a maximum of Rs 1,00,000 only are set for deduction for any tax bracket.


What are Tax saving options available ? 

Tax-saving options under Section 80C

Provident Fund (PF) contribution

Public Provident Fund (PPF) up to Rs 100,000 in a year

Premium for Life insurance policy or Unit-linked Insurance Plan

Tax saving Fixed deposits with Banks

Equity Linked Saving Schemes (ELSS)of mutual funds

Infrastructure bonds

National Savings Certificate (NSC)

Senior Citizens Saving Scheme

Post Office Five Year Term Deposit Account

Payment towards principal amount of home loan

Pension Plans

Note: An additional deduction of Rs 15,000 under Section 80D has been allowed to an individual who pays medical insurance premium for his/her parent(s).

 

Other deductions:

In 2008, Senior Citizens Saving Scheme 2004 and the Post Office Five Year Term Deposit Account have also been brought under the purview of this Section an additional deduction of Rs 15,000 allowed under Section 80 D to individuals paying medical insurance premium for his/her parent(s). 

What are Equity Linked Saving Schemes?
Equity linked savings schemes (ELSS) are mutual funds that help you gain the twin advantage of earning equity-linked returns with the additional benefit of saving tax. ELSS have a lock-in period of 3 years, which encourages long term investing among investors and gives ample time for the fund manager to manage a portfolio of stocks that can outperform over a period of time. 

Why is the Equity Linked Savings Scheme a winner ?
Over a longer horizon, it has been witnessed that equities tend to outperform most other asset classes in terms of returns.

Advantages of ELSS

  • Investments in equity deliver returns over a longer period.
  • A lock-in of 3 years ensures you stay invested for a longer period, thus allowing your money to grow over a period of time.
  • ELSS will endeavour to provide higher returns with tax-efficiency
  • One has the option of investing small amounts of Rs 500 each month in ELSS through Systematic Investment Plans (SIPs)

 

Comparison of risk and returns vis-a-vis other tax saving instruments

 

Instruments

Lock-in Period (years)

Risk Level

Returns ( per cent per annum) CAGR

Minimum investment (Rs)

Maximum investment (Rs)

Tax status on returns

Public Provident Fund (PPF)

15

Low

8.8

500

100,000

Tax free

National Savings Certificate (NSC)

5

Low

8.6

100

NA

Taxable

10

Low

8.9

 

 

Bank Fixed deposits

5

Low

Prevailing 5 Year Rates

10,000

1,00,000

Taxable

Equity Linked Savings Schemes (ELSS)

3

High

Market linked

500

1,00,000

Tax free

Unit Linked Insurance Policy (ULIP)

5

High

Market linked

10,000 (as per premium)

1,00,000

Tax free

 Disclaimer:

The above is provided only for general information purpose. In view of the different nature of tax benefits, each investor is advised to consult with his or her own tax consultant with respect to the specific tax implications arising out of their participation in the any of the schemes.

 
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About Taxation
Tax Rules for Mutual Fund Investors
as per Finance Bill 2011 – SNAPSHOT
 
 
Individual/ HUF
Domestic Company
NRI
Capital Gain Taxation
Long Term (LTCG)
Equity schemes
 
Nil
 
Nil
 
Nil
Debt schemes
 
 
10% without indexation or 20% with indexation whichever is lower + 3% Cess
 
 
10% without indexation or 20% with indexation whichever is lower + 5% surcharge + 3% Cess
 
10% without indexation or 20% with indexation whichever is lower + 3% Cess
 
Without Indexation
 
10.30%
10.815%
10.30%
 
With Indexation
 
20.60%
21.63%
20.60%
 
 
Short Term (STCG)
Equity schemes
15%+3% cess
= 15.45%
15%+5%surcharge*+
3% Cess =16.22%
15% + 3%Cess
=15.45%
Debt schemes
As per Slab rates**
30%+5% surcharge * + 3% Cess
As per Slab rates**
Dividend Distribution Tax (DDT)
Equity schemes
Nil
Nil
Nil
Debt schemes
DDT rates (1.04.2011 to 31.05.2011)
13.519%
21.630%
13.519%
DDT rates (1.06.2011 to 31.03.2012)
13.519%
32.445%
13.519%
Money market
DDT rates (1.04.2011 to 31.05.2011)
27.038%
27.038%
27.038%
DDT rates (1.06.2011 to 31.03.2012)
27.038%
32.445%
27.038%
* Surcharge at the rate of 5% is applicable for domestic companies having net income exceeding INR 1 crore.
 
 
 
PERSONAL INCOME TAX STRUCTURE
Total Income
TaxRates
Up to INR 180,000 (a)(b)
NIL
INR 180,001 to INR 500,000
10%
INR 500,001 to INR 800,000
20%
INR 800,001 and above (c)
30%
  1. In the case of a resident woman below the age of 60 years, the basic exemption limit is Rs 190,000.
  2. In the case of a resident individual of the age of 60 years or more but less than 80 years, the basic exemption limit is 250,000.
  3. In the case of a resident individual of the age of 80 years or more, the basic exemption limit is 5,00,000.
  4. Education cess is applicable at the rate of 2% on income-tax and secondary and higher education cess at the rate of 1% on income-tax.
 
 
WEALTH TAX & GIFT TAX FOR MF UNITS
Wealth Tax
MF units are exempt
Gift Tax
MF units are exempt
Income Tax units provisions on clubbing for Gift of Units
Dividend Income
 

ST/LT Capital Gain/Loss
 
As dividend is tax free in hands of holders, hence no tax applicable on either Donee or Donor
If the transferee or donee is
  • Spouse, Son’s wife or minor son: gain/loss clubbed with that of the donor of units
  • Other independent donee: gain/loss treated as donee’s gain/loss and not clubbed with that of donor
 
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