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F
idelity'sg
uidetoEL
SS
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W
hatyouneed
toknow
abouttaxsavi
ngs
Asrespon
siblecitizens,ourdutyist
omeetourtaxobligation
severyyear.So,there'sn
oescapefrom
tax.However,
thegovernmenthasmadecertainsavings'tax-deductible'andweoweittoourselvestobenefitfrom
theseoptio
ns,
whichcou
ldtranslateintosavingsfo
rthefuture.
Thisguide
willtellyouwhatthenew
taxrulesareandhow
yo
ucanbenefitfrom
them.
3
Gettoknowyourtaxbracket
Howmuchca
nyousave?
Whichtaxsav
erisrightforyou?
TheELSSadv
antage
1.2.
3.
4.
5.
Youdon'tneedtoinvestanentirelakhtocutyourtaxbill
Page
4
Page
5
Page
7
Page
9
Page10
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1.
Gett
oknow
your
taxbracket
Forexam
ple,if
yourtaxableincome
isRs,00,000for
theyear,
y
ouwouldfallwithintheRs
,0,001to
Rs,0,00
0taxbracket.Youwouldh
avetopaythe
fixedsum
forthisslab,whichisRs
plus20%of
theamountthatexceedsRs,0,000
.Inyourcase,this
excessam
ountwouldbeRs
0,000
.So,yourtotal
incometa
xfortheyearwouldbeRs
,000+Rs0,000
=Rs
,00
0.
Youcan'm
ove'intoalowertaxbrac
ketbyinvestingin
ataxsavin
ginstrument.Howdoesthiswork?Readon.
4
30
50
14
,000
30
1,0
14
2
34
4
0
Rs1,60,000
Nil
Rs1,60,001
Rs3,00,000
10%ofinco
meinexcessofRs1,60,0
00
Rs3,00,001
Rs5,00,000
20%ofinco
meinexcessofRs3,00,0
00
Rs5,00,001
30%ofinco
meinexcessofRs5,00,0
00
Lowe
rLimit
UpperL
imit
TaxPayable
Noupper
limit
Everybodywhoearnsanincomefa
llsundera'taxbracket'.Itisim
portanttokeepin
mindthatyour'taxableincome',
orincome
afterdeductions,defines
yourtaxbracketwhichcouldactuallybelowerthantheamountofmoneyyouhave
earnedovertheyear.Thecurrentincometaxlawhasdeterminedfourmaintaxbrackets,whichareasfollows:
Source:Indiabudget.nic.in.Unionbudget,July20
09.Thesearetheslabratesforan
individual(exceptwomenandsenio
rcitizenswhogetsomeconcessions),HUF,
AssociationofPersons,BodyofIndividuals,whethe
rincorporatedornot.Theseratesdo
notincludeapplicableeducationcess.
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Your
annua
l
taxable
income
(Rs)
Your
applicable
taxbefore
investment
(Rs)
Amount
invested
undersection
80C
(Rs)
Your
'new'taxable
income
(Rs)
Your
applicabletax
after
investment
(Rs)
You
r
Savin
gs
(Rs)
2.
How
much
c
an
you
save?
5
Thegovern
menthasmadeahostofindividualsavings'tax-ded
uctible'underoneumbrellacalledSection80Canda
simplenew
rulehasemerged-ifyou
investuptoRs1lakhinataxsavinginstrumentorev
enacombinationofthem
,you
effectivelyreduceyourtaxableincom
ebyuptoRs1lakh.Thism
eansyoucouldsaveuptoRs30,000intaxes.
Thechartb
elowshowshowthishapp
ens:
1,70,00
0
1,000
1,00,000
70,000
0
1,000
2,00,00
0
4,000
1,00,000
1,00,000
0
4,000
2,60,00
0
10,000
1,00,000
1,60,000
0
10,000
3,00,00
0
14,000
1,00,000
2,00,000
4,000
10,000
4,00,00
0
34,000
1,00,000
3,00,000
14,000
20,000
5,00,00
0
54,000
1,00,000
4,00,000
34,000
20,000
7,00,00
0
1,14,000
1,00,000
6,00,000
84,000
30,000
9,00,00
0
1,74,000
1,00,000
8,00,000
1,44,000
30,000
Calculationsb
asedonincomeslabsforFY2009-10.Taxamountsindicateddon
otincludeanyapplicableeducationcess.Itisassumedthatthetotal
taxableincomespecifiedaboveisafterconsideringalldeductions-exceptdeductionsunderSection80CoftheIncomeTaxAct,1961.Theaboveexam
ple
isusedonlyasanillustration.
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Thechart
belowshowstheoptimala
mountyoucouldinvestto
reduceyourtaxes.Asyou
willsee,youdon'thaveto
investanentirelakh!
7
You
r
annualta
xable
incom
e
(Rs)
Your
applicabletax
beforeinvestment
(Rs)
Optimal
amount
toinvest
(Rs)
Your'new'
taxable
income
(Rs)
Your
applicabletax
afterinvestment
(Rs)
You
r
savings
(Rs)
3.Youdon'tneed
toinves
t
anentir
elakhtocuty
ourtax
bill
1,70,000
1,000
10,000
1,60,000
0
1,0
00
2,00,000
4,000
40,000
1,60,000
0
4,0
00
2,60,000
10,000
1,00,000
1,60,000
0
10,0
00
3,00,000
14,000
1,00,000
2,00,000
4,000
10,0
00
4,00,000
34,000
1,00,000
3,00,000
14,000
20,0
00
5,00,000
54,000
1,00,000
4,00,000
34,000
20,0
00
7,00,000
1,14,000
1,00,000
6,00,000
84,000
30,0
00
9,00,000
1,74,000
1,00,000
8,00,000
1,44,000
30,0
00
Calculationsb
asedonincomeslabsforFY2009
-10.Taxamountsindicateddonotincludeanyapplicableeducation
cess.Itisassumedthatthetotalt
axable
incomespecifiedaboveisafterconsideringalld
eductions-exceptdeductionsunderSection80CoftheIncomeTaxAct1961.Theaboveexampleisusedonly
asanillustration.
So,ifyour
taxableincomeisRs1,70,000duringFY2009-10,you
wouldneedtoinvestjustRs10,000inataxsavertor
educe
yourtaxab
leincometoRs1,60,000a
nddropyourtaxtozero.W
henputtingmoneyaside
foryourfuture,itmakesse
nseto
makeuseofallthetaxbenefitsofferedtoyou.
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Provide
ntFund(PF)
PublicP
rovidentFund(PPF)
LifeInsurance
Pension
funds
NationalSavin
gs
Certificates(NSC)
EquityLinkedSavingsSchemes(ELSS)
Tuitionfees
Housingloanre
p
ayments
Section80Coffersawideran
geoftaxsavin
goptions.Yourtaxadvisercantake
youthroughthe
entirelist
butherearesomeofthemostpopularones:8
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4
.Whic
htax
saveris
rightfory
ou?
9
Section80
Coffersyoutheflexibility
tooffsetupto
Rs1lakho
fyourannualincomeagainstlongterm
commitmentsincludinglifeinsurancepremiums,
housinglo
anrepaymentsandeduca
tionfees.
Alternatively,youcanchoosetomak
einvestmentsfor
yourfuture.Or,combineboth!Ifyou
areoptingto
invest,the
keyistochoosetheroute
thatsuitsyour
personalc
ircumstancesandattitude
towardsrisk.
Here'sanoverviewofsomepopular
taxsavers:
earnafixedrateofin
teresteveryyear
(oreverys
ixmonths,asthecasemaybe).These
optionsar
econsidered'safe',sincetheyarebackedby
thegovernment.However,noneoft
heseinstruments
aresafefrominflation!PPFcurrently
provides8%ayear
andNSCs
fetchyouareturnofaround8%ayear
(interestearnedissubjecttotax).Afteraccountingfor
inflation,realreturnsontheseinvestmentsmaynotbe
veryhigh.
gene
rallyreturnapre-determin
ed
amountonmaturity.Ho
wever,someunitlinkedp
lans
areanexception,butth
eyarenotactuallyinvestm
ents
inthestrictsense-apa
rtoftheamountgoes
towardsprovidinginsurancecover-whichdoesno
t
earnyouareturn,while
thebalancegoesintolong
term
investments.
Whilefixedratesavings
andinsuranceareusefulin
theirownrightandshou
ldbepartofawell-balanc
ed
portfolio,ifyouarelook
ingfortaxbenefitscouple
d
withtheearningpotentialofequities,thenconsideran
PPF
N
SC
Insurancepolicies
ELSSorEquityLinkedSavingsScheme
and
.
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Ify
ouarelooking
atinvestingsomemoney
th
atyouwon't
need
inthenearfuture,andare
willingtoridetheups
andd
ownsofthemarket,youm
ayfindELSS
anideal
tax-s
avingoption.
5.TheE
LSS
advanta
ge
Equityfundscanbevolatileintheshortrun,buthave
beenknow
ntobeatinflationandcre
atewealthoverthe
lon
grun.If
youarelookin
gatinvestingsomemoney
thatyouwon'tneedinthenearfuture,andarewillin
g
toridethe
upsanddownsofthemarket,
youmayfind
ELSSanidealtaxsavin
goption.
Thegra
ph
oppositeshowsthreeseparateinvestments
ofRs1,000
eachmadein
Two
investorsinvestedRs.1,000intoNSCs
andPPF.
Alon
gside,anotherinvestorinvested
Rs.1,000inan
ELSS.
Asyoucansee,theELSS
investmentexperienced
greatervolatilitythantheotheroptionsoverthesh
ort
term.Butovertime,its
performanceprovedtobe
farstron
ger.
Now,here'stheeyeope
ner:
Septembe
r
September
1999.
TheRs.1,000invested
in
anELSSin
1999wouldbeworthover
Rs.4,507today.Insharp
contrast,thefixedratesavings
wouldbeworthapproximatelyRs.2,300.
10
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10
ELSS-morethanjustataxsave
r
AnELSSfu
ndisverysimilartoaneq
uityfund.Themaindiffere
ncehoweverisathree-yearlock-inperiod,whichme
ans
youcannotwithdrawyourmoneyfor
thefirstthreeyears.Thism
ayseemharsh,butthelock-inperiodcanworktoyo
ur
advantage
.How?Thefundmanagerdoesnotneedto
,but
holdlar
geamountsofcashtoserviceredemptions
can
devotealargerportionoftheportfoliotoequities,whichhave
thepotentialtoperformbetteroverthelongterm.
11
InvestmentofRs1000indifferentTaxSavers:1999-2009
0
2000
4000
6000
8000
10000
12000S
ep-99
Apr-01
Nov-02
Jun-04
Jan-06
Aug-07
Mar-09
Value (Rs)
PPF
NSC
ELSSF
undsComposite
PPF:2286
NSC:2325
ELSSComposite:4507
Sources:ELSSdata-VerityAnalytics.PPF,NSCData-IndianPublicFinanceStatistics07
-08,MinistryofFinance(Departmen
tofEconomicAffairs).TorepresentELSS,
wehaveconsid
eredtheperformanceofthetenlarg
estELSSfundsthatpublishedtheirfirstNAVsonorbeforeSeptember30,1999.AssumesaninvestmentofRs
1000
begunonSeptember30,1999.PPF-AssumesRs10
00investedinthePublicProvidentF
und.Forthepurposesofsimplicity,r
atechangesannouncedanytimeduringa
monthareassu
medtobeeffectivefortheentiremo
nthforthepurposesofcalculatinga
ccruedinterestattheendofthemonth.Interestforthemonthiscalculatedby
dividingtheeffectiveannualPPFrateby12.Forthep
urposesofsimplicity,interestisassum
edtoaccrueonmonthlybalanceinthePPFaccount.Portfoliovalueshown
here
isnotionalvaluebasedonaccruedinteresttillMarch
31,2009only.NSC-AssumesRs1000
investedinNSCattheprevailinginte
restrate.Assumeshalf-yearcompounding
atprevailingint
erestrate.Pastperformancemayorm
aynotbesustainedinfuture.Theminimumamountactuallyrequiredfortheseinvestmentsmaybemoreorlessthan
Rs1000.Thisgraphisforillustrativepurposesonly.En
dingvaluesareroundedoff.
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