With the introduction of new tax slabs, here's how the income tax slab restructuring and tax benefits on home loan repayments help you save more.
 

Note: Income slabs in brackets are applicable for financial year 2009-10 (before budget).

Note: Additional cess and surcharges as applicable. Figures in rupees.

Saving after availing deductions on home loan interest and principal repayments

Note: It is assumed that the maximum income tax deduction on home loan repayments under Section 80C and Section 24 are availed.

Section 80C: The principal repayment that you make on your home loan is eligible for income tax deduction under Section 80C. The limit under Section 80C is Rs 1 lakh. This will include investments like provident fund, life insurance premium, equity-linked savings schemes of mutual funds, infrastructure bonds, pension plans and home loan principal repayment.

Section 24: Under Section 24, the maximum amount of interest on a home loan towards a self-occupied house that can be deducted from your income is Rs 1.5 lakhs. As a result, your taxable income decreases by that amount.

Source: Economic Times

NEW FUND LAUNCH

With the tax planning and investment season coming to an end in another month and a half, many are running around to get the best of the plans available in the market.

Most of the limit available under Section 80C would have been over by now.

Are there other ways to get tax benefits from taking up useful investments/expenses? Yes, there is always the health insurance plans.

Health insurance premium is technically an expense, as it does not buy any assets.

However it does buy one something more precious than any physical or financial asset – 'Peace of Mind'.

We can have the confidence that in case of a medical emergency, there is the insurance plan to take care of the expenses – to a larger extent if not to the fullest extent.

Looking at health insurance from the point of view of stress free living, it is an investment.

Health insurance plans get benefit under section 80D in the form of deduction from taxable income upto Rs.15,000/- for non-senior citizens and upto Rs.20,000/- if senior citizens are covered.

But many a times for a normal household with parents under the age of 45 and 2 children, the premiums may not come upto the levels at which one can maximise the Section 80D benefits.

Several companies have come up with plans to meet the needs of those who which to have health insurance and also make use of the Section 80D benefit to the full.

Companies like ICICI Prudential Life Insurance, ICICI Lombard General Insurance and Star Health Insurance have come up with health insurance plans where the premium is fixed at Rs.15,000 or nearby values.

The benefits from the plans in terms of medical cover and number of people covered can be determined as per the requirements of the insured.

All these plans also give cash-back facility for out-patient treatment. Normal health plans do not cover out-patient treatment except for some special surgeries. The out-patient claim per year is fixed based on the number of people covered and also the overall medical cover for the family. These are useful plans to consider.

Companies like United India Insurance and Star Health Insurance have come up with plans one can take very high covers for health (above Rs.5 lakhs). These companies are offering such plans as extensions to existing plans from their own companies or any other company.

Supposing Ramesh has a cover for Rs.3 lakhs from a company and has had the plan for the past 2 years, he will not want to shift from that company, as he will get cover for any pre-existing disease form the 3rd year onwards, also he would have got no-claim benfits.

Supposing he wants to increase the cover to Rs.10 lakhs now, his original company may not have a plan to give such high covers. This is the place that the new plans come in, they will provide cover to Ramesh for any claim above Rs.3 lakhs till Rs.10 lakhs.

The premiums for these plans are relatively less compared to the base health insurance plans.

Till last year there was not much choice for tax savers to maximise the benefits under Section 80D.

This year a number of companies are offering innovative plans specifically for this purpose. It is no doubt that these plans will be useful in the long run.

Hope the tax savers find the money to spend on these plans. These are expenses to get an asset called 'Peace of Mind'!

Source: Economic Times

NEW FUND LAUNCH

Reacting to the criticism against Ulips, the insurance regulator has brought about a number of changes in the way insurance companies structure these plans. At the same time, there have been changes in the tax structure on Ulips in the Union Budget. Both these measures have worked out in favour of the investor. If you are looking at a 20-year term, ULIPS charges work out to be more favourable than mutual funds.

Change in the charge structure: How does it impact you?

In July 2009, IRDA had mandated life insurers to impose a ceiling on their ULIPS charges (except mortality/morbidity charges, which is the cost of providing insurance protection). As per the notification, the difference between the gross return and net return (gross return minus the charges) for policies with tenure of up to 10 years should not exceed 300 basis points, while this gap is to be restricted to 225 basis points for those over 10 years.

The fund management charge for policies across maturities was capped at 135 basis points. Following the directive, insurers filed for revised products and phased out the older products by December 2009. "The recent regulatory cap on charges has enhanced the attractiveness of Ulips for customers through higher IRRs and incentives such as guaranteed loyalty additions for staying invested over the long term," says Vishal Gupta, director of marketing, Aviva Life Insurance.

Change in the service tax: How does it impact you?

The finance minister has tweaked the service tax on Ulips, which could increase the net yield by up to 4%. The cost structure of Ulips include policy administration charges, premium allocation charges, mortality charges and fund management charges besides the surrender and fund-switching charges.

As per last year's Budget, an investor was paying a service tax of 10% on all of these components. Now, this tax would be levied only on the fund management charges. This implies the other cost components would be freed from tax, which in turn would add to the internal rate of return (IRR).

This change would effectively create a level-playing field for Ulips and mutual funds, which are treated as competitors among the financial products, say insurers. In mutual funds, the service tax is charged only on the asset management company's (AMC) fees. This change in the service benefit would be passed onto both the new as well as old customers as the revised service tax would be applicable on every premium amount paid once the finance bill is passed.

Are you investing in Ulips for the right reason?

If you have seen any of the ULIPS advertisements, it refers to child's education or retirement planning. The clear underlying message here is the tenure of the investment. Even insurers define Ulips as a long-term insurance-cum saving instrument and hence, the minimum recommended policy term is 10 years.

Even if the policy has an option for partial withdrawals or surrender, you have to look at least 10 years to make some decent gains. "Under the new charge structure, the insurer earns the bulk of charges within five years as there is no year on year cap in charges. Even if the policy permits early exit, you will see significant erosion in capital," says Suresh Sadagopan, a certified financial planner.

What should be your risk appetite?

Ulips have something to give to all investor categories because of high flexibility in altering asset allocation. "Every Ulip has an all debt to a healthy debt-to-equity ratio to an all equity component. So every investor can identify with a Ulips. But if an investor is looking at a 10-year horizon, I recommend pure equity-oriented ULIPS," says Pranav Mishra, senior vice-president & head — Products, ICICI Prudential Life Insurance.

Are Ulips the best investment option?

If you are investing for less than 10-years, go for mutual funds. For longer-term investments, Ulips are a better option following the reduction in the charge structure. Agents, however, mis-sell Ulips by positioning them as a short-term premium payment instrument.

"It also becomes easier to tap a customer as you are not forcing him to get into a long-term contract. The concept of a lock-in and annual/quarterly frequency in premium payments is not very popular with customers. Hence, most agents find it easier to sell Ulips than a simple term plan," says Gaurang Shah, managing director of Kotak Life Insurance.
 

Source: Economic Times

GENERAL

NEW FUND LAUNCH

Else life would be so boring. This article will try to look the pros and cons of investing in Infrastructure bonds for the sake of tax saving. The analysis will be from the perspective of the different "tax groups" post budget 2010.

Tax group 1: Taxable income Rs. 1.6-5 lakhs

Tax group 2: Taxable income Rs. 5-8 Lakhs

Tax group 3: Taxable income above Rs. 8 lakhs

To understand the pros and cons of any tax saving investment we need to look at 4 major parameters

Actual tax saving (let's take the highest saving possible).

Returns from the investment (during the lock in period at the least).

Opportunity cost (what if the same money had been invested in some other investment?).

Effect of Inflation on the returns on investment (what would the worth of your investment be when it comes to redeem/encash it?).

For the sake of parameter two we will have to take an assumption on the lock-in period (as nothing has so far been announced by the Finance Minister). As is generally the case with most tax saving instruments we can assume two scenarios – 3 year lock-in and 5 year lock-in

Let's assume the rate of return on infrastructure bonds = 5.5% per annum.

Let's consider overall rate of inflation to be 8%. (Food inflation itself is currently at 18 %).

For people in the 1.6- 5 lakh taxable income group, as per the new norms the income will be taxed at a rate of 10%.

Parameter 1: Actual tax saving: 10% of Rs 20,000 = Rs 2000 (if you invest Rs 20000 in the instrument you get to reduce your taxable income by 20,000 thus giving a 10% benefit)

Parameter 2: What will be the returns at the end of the lock in period? For a lock in period of 3 years an investment of 20000 would fetch an income of Rs. 3484. When added to the tax saved we get an effective return of Rs 25485 (Rs 20000+3484+2000) on our investment

Parameter 3: If this same amount were to be invested in a market instrument that fetched a return of 15% (which is very reasonable considering that the benchmark Sensex and many mutual funds have given comparatively higher returns on a long period.) the investment would fetch an effective return of Rs 27, 376 (Rs 20000-2000=Rs 18000 invested @15% per annum for 3 years).

Parameter 4: What would be the minimum amount required to counter inflation at 8%? The amount would be Rs 25, 194.

Thus we see that for a person in the slab of 1.6-5 lakh the benefit out of investing in an infrastructure bond as a tax saving instrument will be only Rs 291 (Rs 25485-25194) whereas the benefit out of paying the tax and investing the balance in any decent instrument would be Rs 2182.
 

As seen from the table, it makes sense for people in the >Rs 8 lakh taxable income slab to use the infrastructure bonds as a tax saving instrument. For the people in the 5-8 lakh bracket it would be advisable to invest in infrastructure bonds if the period of investment is 3 years but not for five years and for those in the 1.6-5 lakh bracket it would be an absolute no-no to invest in Infrastructure bonds for tax saving purpose.
 

Source: Economic Times

DIVIDEND

GENERAL