TAX CHAT

Investor: How can I reduce my tax burden by investments in tax-exempt instruments for the financial year 2007-2008?

Advisor: There is section 80C in the Income Tax Act, 1961, which allows you to reduce this burden by almost Rs 34,000, if you invest Rs 1 lakh in the investment instruments stipulated under that section.

Investor: What are the instruments that come under section 80 C?

Advisor: This list includes:

1. Life insurance premium

2. Contribution to recognized provident fund

3. Contribution to Public Provident Fund (PPF)

4. Contribution to super annulations fund

5. Contribution to national savings certificates (NSC - VIII)

6. ULIP of Unit Trust of India (UTI)

7. ULIP of Life Insurance Corporation of India

8. Subscription to units of equity linked savings schemes (ELSS) of a mutual fund.

9. Subscription to units of a pension fund notified by the government.

10. Tuition fees for children's (up to two) education at recognized universities and institutions.

11.Repayment of loan from specific source for residential house property.

12.Term deposit for a period of five years with a scheduled bank

Investor: And how does this work?

Advisor: Here's an example: Let's assuming your income for the accounting year ending March 31, 2007 was Rs 12 lakh and for March 31, 2008 (assessment year 2008-2009), it is going to be Rs 15 lakh.

The tax slabs are as below:

1. On the first Rs 1.1 lakh of income, tax is zero

2. On the next Rs 1.1 lakh to 1.5 lakh tax is 10 per cent

3. On the next Rs 1.5 lakh to Rs 2.5 lakh tax is 20 per cent

4. On income above Rs 2.5 lakh tax is 30 per cent

5. If the income exceeds Rs 10 lakh there is a surcharge of 10 per cent

6. On the aggregate tax, there is education cess of 3 per cent

7. Making highest marginal rate of 33.99 per cent (30 per cent + 10 per cent + 3 per cent)

Investor: Are there any conditions attached to these instruments?

Advisor: At present, there are no limits attached to the savings instruments except PPF, where the limit is Rs 70,000 imposed by PPF rules.

In other words, one can now contribute the entire Rs 1 lakh to one or more instruments and enjoy the tax deduction provided under Section 80 C by the income tax department.

Investor: Would I have to pay income tax on the amount that I withdraw from these savings instruments in the future? How this will work?

Advisor: It is true that there was a talk of shifting from EEE to EET. As a result of that change, the tax payers availing of the tax relief were to attract tax on their withdrawals. However, the good news is that EET has not yet been implemented and therefore you need not worry about the tax on your withdrawals.

Investor: What do EEE and EET stand for? How are they expected to work?

Advisor: EEE stands for Exempt Exempt Exempt, meaning when you deposit in the specified savings you enjoyed a tax relief, the first E, then that saving earned income which was exempt making, the second E and finally, when that savings mature and you withdraw the money, the withdrawal will also be exempt making it third E.

However, the Kelkar committee had recommended that the withdrawals from the savings instruments on which tax rebate has been enjoyed should be taxed in the year of withdrawal.

Accordingly, the present system of giving a tax concession at the time of making the investment should continue and so also the exemption to the income earned on such savings. But when the withdrawal happens, the holder should be taxed. Hence, the expression EET or Exempt Exempt Tax.

Investor: Can I assume that there is no need to worry about the tax on any withdrawal from my savings instruments because the EET has not been introduced?

Advisor: Yes, this is perfectly true. This is because the change in the law taxing the withdrawal has not yet happened.