The tax season is on and investors are scrambling to complete their quota of investments for the financial year 2002. Over here we have outlined various investment avenues falling under several sections (of the Income Tax Act) under which the investor can save tax on his income. This gains even more significance now in view of the recommendations thrown forth by the Dr Y V Reddy committee.

First lets understand the tax sections in some detail before we see what the Reddy Committee has recommended.

Section 88
Under this section an investor can invest upto Rs 80,000 p.a. and claim a rebate of 20% on the investment i.e. Rs 16,000. This will be deducted from his total tax liability for that financial year i.e. he has to pay less tax.

An investor has the option to invest the entire Rs 80,000 in infrastructure bonds issued by ICICI and IDBI to claim a rebate of Rs 16,000. He can of course, also invest Rs 20,000 only and look at other options for the balance Rs 60,000. The most rewarding investments for the balance amount are PPF (public provident fund) and life insurance, as these investments not only attract section 88 benefit but even the proceeds are tax-free. Other attractive instrument avenues include NSC (national saving certificate) as this gives rebate under section 88 and as well as section 80L (exemption upto Rs 9,000 p.a. on the total interest income).

Section 80L
Under this section interest income upto Rs 9,000 p.a. plus Rs 3,000 p.a from government securities (gilts) can be claimed for deduction from the total income of an investor. If an investor's total interest income per annum from fixed income instruments is Rs 50,000 and if he has invested in instruments giving sec 80L benefit e.g. bank deposits he can claim deduction of Rs 9,000 from his total income i.e. Rs 50,000. Moreover, if he has invested in gilts he could claim an additional deduction of Rs 3,000 from his total income and can reduce his tax liability.

Section 54EC
Any long-term capital gain (asset holding more than 12 months) made by an investor by selling shares or house property can save capital gains tax by investing in bonds which give benefit u/s 54EC. There are three bonds NABARD (National Bank of Agricultural and Rural Development), NHAI (National Highways Authority of India) and REC (Rural Electrification Corporation) investing in which a person can save capital gains tax. All the three bonds have a put option after 3 years. Among the three bonds, REC is the most attractive as it gives higher returns than the other two.

Other investments like RBI Relief Bonds, proceeds of which were hitherto tax-free, may also forfeit these tax-benefits. The rate may also be pulled down to a more realistic level.

In the forthcoming Union Budget we may see some changes in the above sections. The Y.V. Reddy Committee had recommended phasing out both sections 88 and 80L, which means that investors can invest in these instruments but will not get the tax sops that they have been getting so far. Another recommendation was to make the returns floating (to a government security of a similar maturity) as opposed to being fixed as they are now.

As investors will agree these recommendations are path-breaking and could mark an end to the ‘tax holiday’ that they have been gifted for so long. Investors have the time to plan their investments accordingly while they can reap the (tax) benefits, as tomorrow it may be too late.

If you are in Mumbai and are interested in bonds, floating rate funds or other investment products, please register here.

Add Comments