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How to make best use of Tax benefit - Series II

Jigar Shah 
on 11 August 2009

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Hi guys, this is the second edition of the series - How to make best use of Tax benefit. I am glad that you have appreciated my efforts and enjoyed reading the previous article.

 
Mr. Einstein once said that The hardest thing in the world to understand is the income tax”, with this article we shall try and make various tax provisions, easier. After insurance it’s time now to shift our attention to some simple but very popular investment options like Fixed Deposit, National Saving Certificate, Provident Funds and Bonds.
 

Fixed Deposit
 
 
Fixed deposits are very common tool of investment option taken up by individuals/corporate assessee in India. It is one of the best savings options available and in fact government likes to promote this inorder to inculcate the habit of savings in the country. It is very easy method of investment, time saving and hassle free.
 
  • As per section 80C, it says that ‘amount invested as term deposit (for a fixed period not less than five years) with a schedule bank or notified by central govt will be allowed an exemption under section 80C. The maximum benefit that can be claimed is upto                  Rs 100,000 in the previous year. (includes five year time deposit in an account under Post Office time deposit rules, 1981)
 
  • The interest accrued on the above investment is reinvested in the F.D and this interest is taxable i.e whether it is received monthly or quarterly.
 
  • The interest taxability is governed by section 194A where it specifies any interest (interest other than by way of interest on securities) received (resident individual) from any bank over Rs 10,000 during the previous year will be taxable and the bank will credit the amount after TDS deduction @ 10% for non corporate entities.
 
(Remember interest on Savings bank account is taxable under head of income ‘Income   from other sources’)
 
National Saving Certificate
 
This investment option is very popular within middle-class. It has different features compared to fixed deposit but the regulation is the same. It is covered by section 80C and rebate is admissible under section 80C upto Rs 100,000 along with the deposit amount.
 
(As per regulations NSC does not attract TDS)
 
Provident Fund
 
This is another popular tool of investment amongst salaried individual. There are three types of provident fund and it has different tax implication. I will elaborate on the 3 types of provident funds and its implication.
 
Statutory Provident Fund: This fund is created for government employees or semi government employees and the investment is made via salary deduction (contribution) every month. The contributions to these funds attract section 80C and the entire amount of interest is exempt under this section.
 {The above section is covered under chapter salary section 10(11)}
 
Recognized Provident Fund: This fund is set up for all private sector individuals and the investment is made via salary deduction (contribution). The features:
a.       In recognized provident fund the employers contribution is taxable in excess of 12% salary (i.e if the employer contributes more than 12% of salary then it will be taxable
b.       Employee’s contribution is eligible for section 80C deduction i.e upto maximum limit of Rs 100,000
c.       Interest is taxable in excess of 9.5 % as salary
d.       When the amount is received on retirement this will be fully exempted u/s 10(12)
(Tip: If you withdraw from the accumulated RPF account within five years of service,   the amount will be taxed)
 
Unrecognized Provident Fund: This provident fund is not recognized by government and the features are as follows:
 
    1. In unrecognized provident fund the employers contribution is not taxable
    2. Employees contribution is not eligible for section 80C deduction
    3. Interest is taxable in under head of income ‘ Income from other sources’
    4. When the amount is received on retirement this will be fully taxable as salary.
 
*Hence it is advisable to invest in Recognized Provident Fund (RPF)
 
Bonds
           
Section 80C says ‘subscription to bonds issued by National Bank for Agriculture and Rural Development (NABARD) is exempted upto maximum limit of Rs 100,000’. At present only NABARD rural bonds are eligible for section 80C and the interest on these bonds is subject to TDS. (although the subscription is closed). In case of corporate bonds, the benefit of exemption is not available to the assessee and the interest accrued or received is taxable.
 
I hope this will prove to be a useful guidance for your investment and you will consider the above benefit before making an Investment. In both the series (I and II) we have covered Insurance, Fixed Deposit, National Saving Certificate, Provident Fund and Bonds. In the next series we will elucidate on few more investment options like Mutual Funds, ELSS or ULIP. So stay tuned till the next edition, until then bye for now!!!
 

 



Category Income Tax
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